What Is the Credit CARD Act of 2009?

Why Was the CARD Act Enacted?

Congress passed the CARD Act in 2009 to "establish fair and transparent practices related to the extension of credit." In the years before the law, many people felt that the credit card industry engaged in abusive and deceptive practices that unnecessarily harmed consumers. For example, they could raise your interest rate on current balances without notice or reason, and process your payments in a way that favored the card issuer.

Less than five years after many of the law's provisions went into effect, the Consumer Financial Protection Bureau (CFPB) reported that the law had helped consumers save over $16 billion in over-limit and late payment fees. The savings have continued to stack up, although late fees still cost cardholders more than any other type of fee.

How the Credit CARD Act Protects Consumers

The CARD Act includes a wide range of consumer protections, mostly related to interest rates, fees, disclosures and marketing toward young adults. The most notables changes include:

No Interest on Paid-Off Balances From Previous Billing Cycles

The CARD Act prohibits a practice called double-cycle billing, which is when credit card issuers would charge you interest based on the average daily balance from the previous two billing cycles. Today, credit card issuers can only charge interest on balances from the current billing cycle, which means you won't have to pay interest on debt you've already paid off.

If you've carried a balance and then pay your bill in full, you might notice you get charged some interest on the next bill. However, that's the residual interest that accrued between when you received your last bill and when you paid it.

Limitations on When Card Issuers Can Raise Your Interest Rate

Before the law, card issuers could raise your rate without reason or notification. Under the CARD Act, card issuers can't raise your interest rate during the first 12 months you have a card. After that, they have to send you a notice at least 45 days before an increase and have a reason for the increase; the increase will only affect new purchases. The issuer also must reevaluate your account every six months and decrease your rate if the reason for the increase no longer applies.

There are still exceptions, though. For instance, variable rates can automatically increase if benchmark rates rise or a promotional interest rate ends. Card issuers can also raise your rate if you don't make minimum payments for 60 days, but they can't raise your rate because you missed payments on a different credit account.

Fewer and Capped Fees

The CARD Act also places limits and eliminates various credit card fees.

• A limit on fees during the first year: Once your account is open, card issuers can't charge you fees that add up to more than 25% of your card's credit limit. These can include annual, monthly and activation fees. However, the cap doesn't apply to late fees, over-limit fees and returned payment or insufficient funds fees.
• Limited over-limit fees: You now have to opt in to allowing your balance to go over your credit limit. If you don't opt in, card issuers can let your balance go over your limit at their discretion, but they can't charge you an over-limit fee. As a result, most credit cards don't have over-limit fees anymore.
• Caps on late and over-limit fees: There are caps on how much card issuers can charge if you miss a payment or go over your credit limit (if you opted in). The amount gets adjusted each year based on inflation, and a slightly higher fee can apply to a second incident within a six-month period.
• No pay-to-pay or inactivity fees: Card issuers can't charge you a fee for choosing a specific payment type, such as paying by phone or online, unless you request an expedited payment. They also can't charge you a fee if you don't use your card or a monthly maintenance fee if your account is closed.

You Have at Least 21 Days to Pay Your Bill

Card issuers must mail or deliver your bill at least 21 days before the bill is due. Additionally, if they offer a grace period, it has to be at least 21 days long. With a grace period, you won't pay any interest on your purchase balance between the end of your billing period and the due date.

You can generally maintain your grace period and avoid paying interest on purchases by paying your bill in full each month. The CARD Act also requires your payment date to be on the same day of each month, or the next business day if that falls on a Sunday or holiday. The issuer also has to process any payments that it receives by 5 p.m. the same day.

Payments Must be Applied in a Way That Favors Cardholders

Many credit cards have different annual percentage rates (APRs) for purchase, balance transfers and cash advances. The CARD Act limits how much interest you'll pay by requiring card issuers to apply any payment amounts over your minimum payment due to the balance with the highest interest rate. However, it can still choose how to apply your minimum payments.

Added Disclosures for Cardholders

Credit card companies also have to include certain disclosures on your monthly statement, such as how long it will take to pay off your balance if you only make minimum payments, and how much you'll need to pay each month to pay off your balance in three years.

Introduced Protections for Young Adults and Students

The CARD Act prohibits issuers from granting new accounts to anyone under 21 years of age unless they have a cosigner who is over 21 years old or enough independent income to afford the credit card payments. The law also limits how credit card issuers can advertise their cards to college students and prohibits card issuers from giving them gifts for applying for or using a credit card.

Issuers Have to Consider Your Ability to Pay

Even if you're over 21 years old, credit card issuers have to consider your ability to afford credit card payments before approving your application. The original rule was amended in 2013 to allow card issuers to consider a household's total income to avoid harming stay-at-home spouses and partners who don't have an individual income.

New Rules for Gift Cards

While it focuses on credit cards, the CARD Act also prohibits gift cards, gift certificates and general-use prepaid cards from expiring within five years of when you activate the card. It also forbids inactivity fees unless the fee is clearly disclosed and the card is inactive for at least 12 months.

What the Credit CARD Act Doesn't Cover

While the reforms continue to help consumers, the CARD Act doesn't cover every type of credit card, and some cards still have potentially costly terms. Some notable exemptions are:

• Small business and corporate credit cards: The CARD Act only applies to consumer credit cards. Corporate cards and small business cards are exempt, although card issuers can voluntarily add similar protections to their cards if they want.
• Maximum interest rates: The CARD Act doesn't limit the maximum APR that credit cards can charge. However, state and other federal laws may apply, such as the Servicemembers Civil Relief Act (SCRA), which limits card issuers from charging active-duty service members an interest rate over 6% on their pre-service debt.
• Deferred interest promotions: Some credit cards have deferred interest offers, which give you a low or no interest rate during a limited promotional period. However, if you don't pay off the balance before the period ends, you have to pay all the interest that would have accrued. With other promotional rates, you generally only pay interest on the remaining balance.

Consumer behavior has also significantly changed since the CARD Act was passed, and many cardholders now manage their credit cards through their online account or app. There's some concern that this keeps cardholders from regularly checking or reading their statements and the included disclosures. They may even miss the notice that their statement is ready or the bill is due, leading to accidental late payment fees.

The Bottom Line

The Credit CARD Act of 2009 helps protect cardholders from many of the costly practices that were common before the law went into effect. However, credit cards still tend to have high interest rates compared to other types of debt. If you have or are considering opening a credit card, compare credit card offers to figure out which card might be a good fit and try to avoid carrying a balance on your card.