What Is the Credit CARD Act of 2009?

Credit cards can be effective financial tools when used wisely. However, if you aren’t careful, they can lead you into significant debt that’s hard to get out of. Unfortunately, credit card companies aim to get consumers into debt because that’s when they make the most money. 

In 2009, legislators passed the Credit Card Accountability Responsibility and Disclosure (CARD) Act to protect consumers from unfair and deceptive policies that could trap them in debt.

What is the Credit CARD Act of 2009, and why does it matter? Let’s take a closer look.

What is the Credit CARD Act of 2009?

The Credit CARD Act is a major amendment to the Truth in Lending Act (TILA) of 1968. It regulates things like credit card fees, interest rates, disclosures, and marketing practices.

Why the Credit CARD Act was created

The regulatory landscape around credit cards is constantly changing. Each time legislators pass a new law, lenders find new methods to increase their profits. If those methods involve tricking consumers or placing unfair burdens on them, a new law is passed, and the cycle continues.

The Credit CARD Act of 2009 is a great example of this. The TILA (passed in 1968), the Fair Credit and Charge Card Disclosure Act (passed in 1988), and other laws required credit card companies to be more transparent about interest rates, fees, and other costs associated with taking out credit cards.

Additionally, the Equal Credit Opportunity Act (ECOA) of 1974 prohibited lenders from discriminating based on sex, race, income source, and other factors unrelated to creditworthiness. 

Thanks to these laws, credit card companies are not allowed to blatantly discriminate or bury their rates and fees in pages of fine print. However, prior to the Credit CARD Act of 2009, regulators noticed that credit card issuers had found new ways to abuse and deceive consumers:

• Raising interest rates with no notice or reason
• Applying credit card payments in ways that clearly benefited the issuer
• Charging very high late fees
• Charging for over-limit transactions (even if the account was pushed over the limit by interest)
• Giving consumers only a short amount of time to pay bills
• Aggressively marketing cards to college students

By passing this act, legislators hoped to further increase transparency in the industry and protect consumers from predatory practices.

How the Credit CARD Act regulates interest rate increases

Prior to the Credit CARD Act, credit card issuers could raise rates on consumers without warning. The law did not outlaw rate increases, but it imposed several new regulations.

Card issuers must issue advance notice for interest rate increases

The act requires credit card companies to inform consumers of upcoming increases at least 45 days in advance. They also have to give consumers the opportunity to cancel their accounts before the increases take effect.

New interest rates cannot apply to old balances

The law prevents credit card companies from hiking interest rates and then retroactively applying them to old balances. Increased rates can apply only to future transactions.

However, the law does include an exception to this rule. When a consumer is 60 days late on a payment, the credit card company can increase interest rates on both old and new balances. If the consumer makes the next six payments on time, the issuer has to drop the interest rate to what it was before.

Universal default is not permitted

Before the Credit CARD Act went into effect, a consumer could see interest rates increase across the board after defaulting on one account. This practice (known as “universal default”) was banned under the act.

Card issuers must offer an introductory grace period

The Credit CARD Act of 2009 prohibits interest rate increases in the first 12 months after a consumer opens an account. However, there are a few exceptions. The rate can increase if it is (1) tied to an index, (2) a promotional rate expiring after at least six months, or (3) the result of a payment that is at least 60 days late.

Payment protections under the Credit CARD Act

The Credit CARD Act also introduced several payment protections for consumers. These are some of the most critical.

Consistent due dates and cutoff times

Card issuers must send your statement at least 21 days before the billing deadline. They also can’t have daily cutoff times before 5 p.m.

No double-cycle billing

Before the Credit CARD Act was passed, credit card issuers could calculate interest based on your previous two billing cycles. The act prevents credit card companies from charging interest on balances that customers have already paid.

Extensions for weekends and holidays

If a payment due date falls on a holiday or weekend, the act requires it to be moved to the next business day.

Allocation of payments

For some cardholders, separate interest rates apply to different portions of their balance. In that case, the issuer must apply payments to the portion with the highest interest rate first.

Fee caps

The Credit CARD Act prohibits excessive late fees. Notably, the Consumer Financial Protection Bureau determined that a fee of $8 per late payment would be enough for major card issuers to cover collection costs. Consequently, late fees are capped at $8 for companies that have over 1 million open accounts.

Looking to build your credit?

What is the Credit CARD Act of 2009 good for? If you’re trying to get ahead financially, this law is beneficial for you. By promoting transparency and limiting card issuers’ ability to charge unfair fees, the act reduces your risk of getting into more debt than you can handle.

If you’re looking for more ways to build up your credit score, try Kikoff! We’re a credit-builder app aimed at making building credit fun. We don’t run a hard check on your credit when you apply, and it’s free to join. Get started with us today!