Vision Credit Education, Inc.

President Obama signed into law the Credit Card Accountability, Responsibility and Disclosure (CARD) Act on Friday, May 22, 2009. While the Act does not substantially change the provisions already enacted by the Federal Reserve, it does move up the effective date by about 4 months.

CARD Act Background

The CARD Act of 2009 is one of the biggest regulatory measures to be enacted on the credit card industry. It essentially revokes the authority of credit card issuers to “police themselves” as they previously had claimed they could be trusted to do.

Credit card issuers had become the subject of a firestorm of criticism as consumers increasingly vented to their legislators about their frustrations with credit card policies. When President Obama met with the leaders of credit card issuers earlier in the year, it was apparent that the push from consumers would outweigh the voice of the powerful credit card lobbyists.

Members of Congress overwhelmingly approved the Act, with only Senators and Representatives from the credit card friendly states of South Dakota and Delaware dissenting. The President had already indicated his support for such a bill, and he had set a deadline of Memorial Day for signing it into law. The Act was signed on May 22.

CARD Act Provisions

The CARD Act severely restricts credit card issuers by limiting the types of term adjustments that can be legally made to existing and new credit card agreements. There will be some profound impacts to several segments of credit card users.

1. College Students: Credit card issuers may not send prescreened credit card offers to anyone under age 21 unless they have opted to receive such offers. Gifts such as T-shirts or frisbees may no longer be provided on campus as a reward for completing a credit card application. Contracts would require a cosigner for anyone under age 21 unless the applicant can supply proof of ability to repay any debt incurred.
2. New Applicants: Credit card issuers may not raise the interest rates on new accounts during the first year of account activity. Exceptions include variable rate adjustments, promotional periods of at least 6 months or if an account holder becomes 60 days past due. Fee harvester cards may not assess fees and other charges related to opening the account that total more than 25% of the total credit limit. New cards must consider the applicant’s ability to pay.
3. All Account Holders: Interest rate increases on new purchases must be announced with at least 45 days notice. Existing balances are protected from interest rate increases, with the exceptions of variable rate adjustments, promotional periods ending after 6 or more months or if the account becomes 60 days delinquent. Cardholders that opt out of new terms may repay the balances at the old terms over a 5 year period, or they could be required to pay an increased minimum payment so long as the principal portion of the payment does not double. Additional limits on penalty fees have been imposed which requires cardholders to opt into over-the-limit charging privileges. Accounts subject to a penalty rate increase must be reviewed every 6 months and issued a lower rate if the cardholder has been making on-time payments during the review period. Double-cycle billing is prohibited. Due dates also are fixed so that they fall on the same date every month. Cardholders have until 5pm on the due date to deliver a payment on-time. Credit limit increases must consider the applicant’s ability to pay. Additional payments above and beyond the minimum payment must be applied to the highest interest rate balance first.

Implementation

Two changes go into effect on August 20, 2009. First, card issuers must provide at least 45 days to notify the account holder of any changes in terms to their cardholder agreement. Second, statements must be sent at least 21 days prior to the due date. The rest of the changes will not be effective until February 22, 2010.

Effects on Availability of Credit

Account holders will likely continue to experience increases in their interest rates up until the date of implementation. While card issuers may certainly lower interest rates after that time period to retain their best customers, they will be severely restricted in raising rates to their other customers. Many account holders should expect some increases in their interest rates prior to  February 2010.

Consumers looking to establish credit may find it harder to open multiple credit accounts in a short period of time. The terms of these newer accounts will probably charge higher interest rates for purchases, making credit cards a less appealing choice for short-term credit. Credit limit increases are expected to slow down as card issuers must confirm a cardholder’s ability to repay a higher potential debt balance.

Many attractive rewards programs may be trimmed as card issuers attempt to preserve profitability. Some rewards programs may be eliminated while others may dilute the benefits. Expect to see rebates reduced.

Applicants aged 18-20 will have the hardest time gaining new credit. They will have to either prove their ability to make payments or supply a cosigner for the account. This is expected to cause average credit card balances carried by college students to drop dramatically over the next 5 years, which should ultimately produce more financially stable consumers in the marketplace.