Credit CARD Act
It should come as no surprise that the credit card industry is highly regulated. The potential for fraud and abuse involving consumer credit was apparent from early on, and legislation was introduced to protect consumers and preserve their confidence in the system.
Since then, our shopping habits—and our standards for acceptable lending practices—have evolved. New regulations were needed for the credit card industry of the 21st century, and they arrived with the 2009 passage of the Credit Card Accountability Responsibility and Disclosure Act. How did the Credit CARD Act of 2009 change the credit card industry?
- What Is the Credit CARD Act of 2009?
- How Does the Credit CARD Act Protect Consumers?
- How Does the Credit CARD Act Affect Merchants?
Processing credit card payments is a complex, intricate process, and part of the reason for that is the fact that there are a lot of rules and regulations that every party involved in the process is required to follow. In fact, it was federal legislation that created the chargeback process.
The Fair Credit Billing Act of 1974 gave consumers the right to dispute charges that were unauthorized or billed in error, and each card network adapted the framework laid out by this law into their own set of rules for disputes and chargebacks.
To protect their brands and ensure a consistent experience for cardholders, the card networks require the issuing banks and acquiring banks that work with them to follow their rules carefully.
While the card networks update their rules frequently in response to changing market conditions and consumer sentiment, credit card legislation moves at a slow and staggered pace—and rarely in a direction favorable to merchants. The Credit CARD Act of 2009 focuses on granting additional protections to cardholders, although some consumer advocates would argue that it doesn’t go far enough. Nothing about the law improves the chargeback process or offers much else to benefit merchants, but let’s take a closer look at what it does entail.
What Is the Credit CARD Act of 2009?
The global financial crisis of 2008 did a lot to damage the public’s trust in the financial industry, and set the stage for a major regulatory overhaul, most famously in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created an entirely new oversight agency: the Consumer Financial Protection Bureau.
However, this law was aimed squarely at the root causes of the 2008 financial crash. A separate bill, originally framed as a Credit Cardholder’s Bill of Rights, was introduced in 2009 and signed into law less than a year later as the Credit Card Accountability Responsibility and Disclosure Act.
The CARD Act is an amendment to the Truth in Lending Act of 1968, an initial attempt to regulate consumer credit that established various disclosure requirements and borrower rights. The CARD Act expands on those rights and places limits on issuers’ fees, rate increases, and marketing practices.
How Does the Credit CARD Act Protect Consumers?
The Credit CARD Act focuses on the relationship between the cardholder and their issuing bank, and addresses a number of exploitative practices that had arisen since the passage of the Truth in Lending Act.
- Interest Rate Increase Limits
Before the Credit CARD Act, issuers were allowed to increase the interest rates on a customer’s account at any time, without warning. Now, they are required to wait until an account is at least 12 months old before raising its APR, and they must provide notice 45 days in advance. The customer has the right to cancel their account before the change takes effect and pay back their remaining balance over a five-year period at the original APR.
- Fee Limits
The Credit CARD Act requires that fees be “reasonable and proportional” and establishes a cap for late payment fees, which the CFPB has the authority to review and adjust on an annual basis. In addition, it prohibits over-limit fees unless the cardholder specifically opts in to allow their issuer to approve and charge them for over-limit transactions. “Fee harvesting” practices, such as high annual fees charged to consumers with low credit scores, are also restricted.
- No Double-Cycle Billing
Issuers used to be able to calculate interest charges by using the average daily balance of the cardholder’s last two billing cycles. This was called double-cycle billing, and it was prohibited by the Credit CARD Act because it could result in cardholders getting charged higher interest rates for purchases they had already paid off in full. Issuers are now restricted to using only the average daily balance from the most recent billing cycle.
Fair Due Dates
Per the law, issuers are required to give cardholders at least 21 days to pay a bill from the date it was mailed, and must follow various other rules intended to prevent cardholders from being “trapped” into incurring unfair late fees.
- Age Limits
The Credit CARD Act prevents issuers from letting anyone under the age of 21 open a cardholder account, unless they have a cosigner or can provide proof of income sufficient to cover their consumer debt.
- Marketing Restrictions
Issuing banks can no longer market credit cards directly to college students, unless they specifically opt in.
How Does the Credit CARD Act Affect Merchants?
Interactions between merchants and consumers are not the focus of the Credit CARD Act. The laws around disputes and chargebacks have never been meaningfully updated to address merchant concerns, such as friendly fraud and other abuses of the chargeback process.
Merchants don’t even get to enjoy the benefits of the Credit CARD Act with their own business credit cards—the act’s protections only apply to consumer credit cards.
Conclusion
The Credit CARD Act extends a lot of new protections to consumers, but there are some who say it doesn’t go far enough. The act doesn’t put a cap on maximum interest rates, preserves issuers’ rights to charge “penalty” interest rates on late-paying accounts, and fails to address a number of common predatory lending practices.
Even so, it may have helped reset expectations to a more consumer-friendly baseline—many issuers now go beyond the requirements of the Credit CARD Act in their attempt to win new customers.
Hopefully, a time will come when new credit card legislation gives due consideration to the essential role merchants play in the payments ecosystem. Long-standing issues like friendly fraud and merchant liability for third-party fraud have not been reviewed since the 1970s. Until that day arrives, merchants will have to protect themselves by fighting fraud and chargebacks to the best of their abilities.
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