What Is the CARD Act of 2009?

In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act (the CARD Act or Credit CARD Act for short). As an amendment to the Truth in Lending Act, its primary purpose is protecting cardholders from unfair (and possibly abusive) lending practices.

It does this in many ways, like requiring credit card companies to increase transparency regarding some interest rate increases. The CARD Act also puts caps on late fees and changes over-the-limit fees. Another area it focuses on is the extension of credit to anyone under 21. Unless they show proof that they can pay their debt because of independent income, they must have a co-signer over the age of 21 on the application.

Although passed 14 years ago, the CARD Act still positively affects consumers today. Understanding what it is, how it works, the protection it affords and the loopholes that still exist allow individuals to make more informed financial decisions.

Using a credit card has become commonplace in today's economy. However, the credit card market has changed over the years. Before the CARD Act's implementation in 2009, some cardholders may have experienced unfair lending and billing practices.

Examples include unwarranted or undisclosed interest rate increases and extensive charging of late and over-limit fees, which made managing debt more challenging. Others were terms and conditions that were confusing and difficult to comprehend, marketing practices targeting financially inexperienced consumers and unfair billing practices.

The average interest rate commercial banks charged on credit cards was as much as 16% in early 1995 — and it declined to around 12% the year before the CARD Act was passed. But interest rates being high wasn’t what caught legislators’ attention — it was the unfair practice of some credit card issuers raising the interest rate without notice and without reason. They could even apply the new rate to an existing balance.

Some also charged numerous fees, increasing the overall cost of credit. An example was fees for going over the limit on a credit card. Over-the-limit fees more than doubled between the mid-90s to 2005, going from less than $15 to over $30.35. By 2008, the average fee, according to the CFPB, was $34.80 per over-limit transaction.

The Truth in Lending Act requires all lenders to disclose all charges and fees a consumer may encounter when using a credit card. However, the presentation is as important as the data itself. With terms and conditions using complex industry-based jargon, the average cardholder may not have completely understood the contents before the CARD Act enacted changes.

A 2006 study by GAO found that some issuers used small typefaces, lowering the document's usability and readability — and most would skim over it, glossing over crucial information. They would also not group related information together, such as fees. That often resulted in cardholders not knowing when late fees were applied and what may cause issuers to increase interest rates.

Those under 21 (especially those in college) were at the receiving end of some credit card issuers' aggressive marketing practices, which used various channels. A 2001 GAO report showed the following based on the responses of six large issuers:

• All six marketed credit cards to college students through the internet
• Five out of six used direct mail
• Half used on-and-off-campus tabling, including at athletic events
• A third maximized banking relationships
• Only one used an 800 number or a telemarketer

Now, a credit card isn't a disadvantage for college students. It can provide financial flexibility and help them establish a good credit history if they use it responsibly. However, they often lack experience managing their finances, and having a credit card may cause them to incur debt that is a burden to pay off.

The GAO report stated that nearly half of college students graduated in 1988 with an average of $19,400 in student debt (over $36,000 in 2023 when accounting for inflation) — adding credit card debt can make repayments overwhelming.

The CARD Act aims to increase credit card issuers' transparency so consumers do not have to worry about unnecessary costs associated with their credit cards. Prior to establishing the Act, legislators saw various billing practices as unfair and deceptive. Among these, double-cycle billing, payments for deferred interest, universal default and fees for late payments and exceeding the credit limit were most prominent. Most of these became regulated or abolished when the CARD Act went into effect.

The CARD Act of 2009's enactment brought many changes to the credit card market — geared toward protecting consumer rights and increasing transparency and accountability of credit card issuers. There were numerous changes, but we can categorize them into three main groups: consumer protection, enhanced consumer disclosures and the protection of young consumers.

Early notification of some interest rate increases and limits on fees fall under consumer protection. Others in this category include stopping double-cycle billing, doing due diligence regarding a customer's ability to pay before issuing a credit card and ensuring cardholders receive their statements at least 21 days before the due date.

Enhanced disclosures require issuers to post agreements online where consumers can easily access them, and the protection of young consumers involves a revised process of extending them credit.

It's crucial to note that these aren't the only changes brought about by the CARD Act.

The CARD Act aims to stop credit card issuers from charging consumers unnecessary costs. These touch on several areas, such as interest rate hikes, double-cycle billing and caps for late fees. Consumer protection also ensures cardholders avoid negative financial situations by having issuers check their ability to pay before extending credit and sending timely statements.

A second set of changes brought by the CARD Act of 2009 targets disclosures issuers give. Credit card companies must inform consumers about, for example, minimum payments and due dates, and ensure the credit card agreement is readily available online.

The last set of changes from the Credit CARD Act focuses on young consumers — particularly those who are under 21, whether in college or not. These prohibit issuers from extending credit to them without a co-signer unless they meet certain requirements. They also cannot give gifts in exchange for applying for a credit card.

It's been over two decades since former President Obama signed the CARD Act into law. Since then, the landscape of the credit card market has changed, displaying the Act’s impact.

A Federal Reserve Bank of Boston 2013 study focused on how banks responded to the CARD Act. It found that issuers began lowering credit limits between when the Credit CARD Act became law and most of its provisions took effect (February 2010).

The CFPB found that consumers in 2012 would have paid over-limit fees totaling $2.5 billion without the Act in place if consistent with 2007 levels. And late fees decreased by $6, reducing the total amount paid by $1.5 billion.

But the story doesn't end there. With the report that the CFPB issues biennially, we can better understand the impact of the CARD Act (at least until 2021). MoneyGeek presents timelines on its effects in two areas — over-limit and late fees and transparency and accessibility.

The 2009 CARD Act increases consumer protection by capping late fees issuers charge. Credit card companies also must give consumers the choice of opting in to authorize over-limit transactions. If they don't, they can’t make over-limit purchases, erasing the possibility of an over-limit fee.

The Credit CARD Act also enhances disclosures from issuers. These are in the form of statements showing the essential information regarding due dates, outstanding balances, and minimum payments, as well as timelines to pay off the debt, and ensuring consumers can access agreements online.

Despite the various reforms the CARD Act of 2009 brought, it isn't without its shortcomings. For example, while credit card issuers cannot charge consumers fees exceeding 25% of the credit they extend, some subprime credit card issuers have found ways to circumvent it by charging high fees before accounts are opened and increasing them in the second year.

There's also the cap on late fees. Although the Credit CARD Act applies a limit, it is reassessed each year due to inflation. When the Act’s provisions took effect in February 2010, the average late fee went from a little over $33 to a bit over $23. As of 2022, an initial late fee is $30 (a second late fee within six billing cycles is $41).

The CARD Act of 2009 has been in effect for over a decade, but some consumers may be unfamiliar with what it covers. MoneyGeek has answers to questions cardholders may ask to provide more information about it.

Having a credit card comes with many benefits. It provides financial flexibility and can help you build credit. However, knowing the ins and outs of how credit cards work does wonders to help you manage your finances.

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