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Congress Passes Credit CARD Act of 2009, Now What?

This article was written by in Credit. 26 comments.


Yesterday, the House of Representatives voted on and passed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, the Senate’s alternative to the Credit Cardholders’ Bill of Rights. Here are some of the provisions, taking effect in February 2010:

Credit card companies must give 45 days notice before raising interest rates. Under current rules, a credit card company can raise interest rates on a customer for any reason at any time with no notice. Normally, the cardholder can refuse the rate increase and close the account, and the issuer will provide a chance for the customer to pay down the balance. The new bill, once signed into law and put into effect, will require advance notice.

Credit card companies must apply your payments to your highest interest rate balance first. Let’s say you took advantage of a 0% balance transfer offer for $10,000 but ended up needing to use the credit card for an emergency and made a $2,000 purchase at an interest rate of 10.99%. Currently, any payment you make is likely to be applied to your balance transfer until you pay off the $10,000, forcing you to be charged interest on your $2,000 balance. The new rules would change this practice.

Minors will not be able to own their own credit cards. Anyone under the age of 21 requires a parent or legal guardian to be the main account holder. The child or student could then be an authorized user on the account. There is an exception for students who have income and can prove they can be responsible for the charges on their own. Currently, my cat could get a credit card. He’s only twelve years old.

Consumers will need to “opt in” to charge above their credit limit. In the “good old days” of credit cards, if you charged more than the level of credit the issuer decided to grant you, your purchase would be declined, the waiter would return to your table, embarrass you in front of your friends, and cut your card in half with a pair of scissors. These days, you are allowed to go over your limit, but you will be charged a fee for doing so.

Credit card issuers claim this is a service; they would be mortified if one of their customers would be forced to live without air conditioning in the dark because the payment via credit card for the electric bill didn’t go through. Under the new law, consumers would have to “opt in” to receive the benefit of being charged a fee. In any situation, it helps to monitor your usage so you know when you are approaching the limit.

Your existing balance will not be subject to “universal default.” Today, it’s common practice for many credit card issuers to automatically raise interest rates if you are over 30 days late, or default, on a debt payment to anyone else who reports to agencies like Equifax and Experian. If this happens to you, you may find your interest rate to be increased on your full balance. The new law does not outlaw universal default, but it does prevent old balances from being affected. Only new charges will be able to be assigned a default rate.

Anticipating and fearing the future expense of these changes, some credit card issuers have already begun raising interest rates, lowering limits, and reducing rewards across the board. Many people I’ve spoken to, and some who have commented on Consumerism Commentary, are concerned that well-behaved credit card users who pay their bills in full each month and reap the rewards will have trouble finding amazing credit card deals in the future. I’m not too concerned.

The glut of rewards in the past decade is an anomaly. The game of credit card arbitrage, moving balances around from one card to another to take advantage of 0% interest rates while your borrowed money is earning high interest in a bank account, has always been dangerous, and in the end, a losing proposition. The ubiquity of these deals has significantly decreased over the past few years, anyway.

Credit is flowing better than it was six months ago. Yes, there are still people out there having difficulty obtaining loans, but for the well-qualified, like those who pay in full and are responsible, won’t find much trouble with credit card offers.

Credit card companies will still be competitive. They’re not going to drop their rewards programs. Even if they’re not making money on interest fees and late charges, they are making up to 3%, sometimes more, on every regular transaction through merchant fees, and the value of rewards that come back to the consumer is usually less than 1%. Credit card users who seek rewards, like me, charge more on their credit cards, so the issuers make more money on us than we’d like to believe.

Personal responsibility is an important lesson that should be learned prior to opening a credit card account. Paying attention to your own finances may alleviate 80% of the headaches pertaining to credit cards. But as customers get savvier, the industry finds ways to make dealing with them more difficult for the issuer, hiding rules deep in the twenty-page pamphlet of fine print and changing those rules on a whim.

I expect that credit card issuers will continue finding new ways to make money off of customers who either don’t pay attention to their finances or find themselves in financial distress due to external or unforeseen circumstances, and I expect that responsible users will continue to find moderate and reasonable rewards for good credit behavior.

Updated May 26, 2009 and originally published May 21, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 13 comments… read them below or add one }

avatar the weakonomist

What it does not include is any cap on interest rates. Even if that cap is indexed to something, I think there needs to be a cap on the effective rate including certain fees.

Other than that things seem OK, and I have no doubt credit card companies will be able to maintain profitability long term.

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avatar tom

Only time will tell.

We are already seeing cuts to rewards programs, Chase and AmEx are the most recent. My Costco Business AmEx just went from 5% on gas to 4%. Is it coinicidence that this is happening at the same time as the bill? I don’t think so, but others argue that rewards programs have been slowly cut over the past few years.

Credit card companies make a lot of money off fees and interest, this bill cuts and limits that money, so how will the companies make up for that loss? That is the big question moving forward.

I’ve stated here before that I’m against this bill. The “unfair” practices of credit card companies are layed out in the terms and conditions. Credit cards are a revolving loan that consumers sign a contract to use. They should be reading the terms and conditions before signing or borrowing anything. If you do not, I don’t believe you have the right to complain when your interest rate skyrockets because of universal default:

From Citi:
“We have the right to change the rates, fees, and terms at any time, for any reason, in accordance with the cardmember agreement and applicable law. These reasons may be based on information in your credit report, such as your failure to make payments to another creditor when due, amounts owed to other creditors, the number of credit accounts outstanding, or the number of credit inquiries.”

There are extenuating circumstances, but a majority of consumers that carry balances simply bought more stuff than they could afford, and they signed a contract for the loan to buy that stuff.

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avatar Luke Landes ♦127,485 (Platinum)

You ask how the companies will make up for the lost income due to lowered fees. The bill doesn’t fully restrict raising interest rates. There will still be many opportunities for issuers to change the terms on the consumer. Additionally, credit cards make a big portion of their revenue from merchant fees. I expext these will continue to increase as they have been over the course of decades, contributing to higher prices for everything we buy.

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avatar Jeff

I agree with these two paragraphs:

“Personal responsibility is an important lesson that should be learned prior to opening a credit card account. Paying attention to your own finances may alleviate 80% of the headaches pertaining to credit cards. But as customers get savvier, the industry finds ways to make dealing with them more difficult for the issuer, hiding rules deep in the twenty-page pamphlet of fine print and changing those rules on a whim.

I expect that credit card issuers will continue finding new ways to make money off of customers who either don’t pay attention to their finances or find themselves in financial distress due to external or unforeseen circumstances, and I expect that responsible users will continue to find moderate and reasonable rewards for good credit behavior.”

Yeah, some changes have been made, and they’ll generally help out – but the responsible credit card users will still pay off their balances and not be affected by much of it, and those who aren’t so responsible will still find their way into trouble…

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avatar Miranda

Personally, I wonder what havoc credit card issuers will wreak between now and February. I have a feeling it will include higher interest rates (since they can still do that), a frantic rush to cut rewards and an increase in a number of other tactics that they use to get money. Maybe even raise fees…

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avatar Eden

I agree with the general sentiment here. I think a lot of the tactics by these CC companies were at the least very sneaky and at worst deceptive. However, it’s not like anyone put a gun to someone’s head and forced them to sign up for a bad credit card (at least I don’t *think* they are doing that).

For me, the best answer is simply no credit cards. I find my life is a lot more simple without an open link to these companies. Clearly, the next best solution is to be ‘one of the good ones’ and always pay off your balance early, but it’s also likely the perks will be dwindling as these companies already know they aren’t making any money from the smart people.

In the end, the legislation isn’t bad, but it seems rather pointless.

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avatar Luke Landes ♦127,485 (Platinum)

Some issuers have already begun this over the past few years, perhaps anticipating the recession with a decrease in spending or anticipating increased regulation with a Congress (ans then a White House) that’s more inclined to do so. Will the fee and interest rates inrease *faster* now? And if they do, will it be due to this new law? Perhaps, perhaps not. There are too many variables to declare unequivocally. It looks to me the trend of lowered benefits over the past few years will continue, but there should be good deals out there for responsibe users thanks to the money issuers make on rewards cards.

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avatar Kevin Waldron

I love that the age of a minor is listed as 21. You can get drafted into a war at 18, and we’d trust you to go and fight for our country. But God forbid we give you a line of credit or a sip of alcohol.

Our kids will continue to be kids as long as we treat them as such.

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avatar Chris

I worked for a card company for a few years and one of my jobs was actually tracking the metrics of the, at the time 10 largest card companies. While it is not as high as it used to be, the top 10 card issuers still control almost 90% of all credit card receivables. I have not decided what I think of this bill yet as there are good things and bad things about. Interestingly enough, the one company that will be most affected by it predicted this would happen several years ago and had theoretically started cchanging their practices to fit this.

Realize that card companies can be split into two categories, those that are designed to make money from users versus make their money from revolvers. Companies like Discover, Bank of America (formally MBNA) and American Express were originally built to make money from all the interchange fees. Companies like Chase, Capital One, Citi and HSBC were designed to make money off revolvers (i.e. interest charges) and fees.

Some of the changes I agree with but one of the unintended consequences of not allowing “minors” to have credit cards without a co-signer, will be a large gap in establishing credit between the have and have nots. Those who have parents that can co-sign will always get a card yet those who are on their own will be coming out of college with little credit experience.

I do wish they would have indexed rates to either libor, prime or fed funds. Part of the problem is that congress was trying to cap rates at to low a level. While some things were predatory poor credit risks should be paying more. I see nothing wrong with jacking up rates to a max of 29.9% for the worst offenders. All that will happen (if I held a balance that is) will be to increase my rate to make up for the losses on the more risk customers. I am sick of subisidizing poor risks.

What most people don’t realize is that prior to the 90′s only the very best credit risks got a credit card. Unfortunately credit cards are so ubiquitous that it is hard to live without one these days. You need it for car rentals and plane tickets. This will also force borrowers to the worst offenders when they need money, the check cashing and over night lending places on the corner.

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avatar Tom

I feel in the short term that rates will rise, annual fees imposed, rewards will be cut, and perhaps even the interchange fees increased. The banks will be driven to make these units profitable as soon as possible. Some banks will look for revenue in some of these places, others make look for revenue in all of them. Over time I expect this to level out and we start to see the rewards go back up. The real key is, where will banks find the “loophole” in the new law? Once one bank starts a trend in that area, the others tend to follow.

Regarding the age limit for credit cards, I agree that there is too much coddling of our youth. First I don’t think a parent or anyone should cosign for a loan / credit card for anyone (not saying there should be a law against it, just saying I wouldn’t recommend it). But if a person between 18-21 meets the same criteria that someone over 21 is “required to meet” for being able to afford the card, they should be able to get the card. Interestingly the CARD Act specifically says that under the age of 21 they must be able to prove the ability to pay for the card. Why wouldn’t this be a requirement that a lender has for borrowers of all ages?

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avatar kalyson

I think the credit card companies are going berserk. I just applied for a BofA card and was denied, and a Capital One card and only was offered a 500 limit. This is odd because:

1) I have perfect credit. No late payments, no bad reporting ever on anything.

2) Credit scores in the mid 700s. They were much higher until I ignorantly closed a bunch of old accounts I was not using. Didn’t know that would have an ill-effect.

3) Debt to income: pay off credit cards every month. Basically have no debt other than a single low car payment. Earned about quarter of a million last year. Owe virtually nothing.

4) Had prior credit with BofA – credit card I closed that had had 15,000 limit and was paid perfectly in full.

5) Have a current credit card with Capital one with limit of 20000, high balance of 16500 and it has always been paid off completely every month, regardless of the balance (yes, including the 16500 in a single month.)

Go figure.

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avatar Hott Nickels

Kalyson, if I were a credit card company i wouldn’t give you a card either. You’re too responsible! How would I make any money off of you? A guy like you would probably just keep paying his balance off in full and milking me for rewards. You paid $16.5 K in a month! Jesus man! The system doesn’t reward that because it is a for-profit system and they are not profiting off of you, you are profiting off of them! No wonder they insulted you with a $500 minimum. A BOOKIE WILL NOT CONTINUE TO GIVE YOU MONEY IF THEY NEVER MAKE ANY VIG OFF OF YOUR DEBT.

Note to all: If you care about negatively affecting your credit record, don’t ever ever cancel a card unless you open a new card before. Even then you’re gonna take a hit albeit a smaller one. And even before that, you call them and tell them that company X is offering you a better deal and you’re gonna jump ship unless they at least match it. Period. Canceling a card only shows them that you are trying to break free from the matrix. They don’t want that. Nobody wants to be a debt slave, but the entire system is based on debt (i.e. money that is created out of thin air), and if you project that you are not down with the system and that you want out, its only a matter of time before they make life difficult for you and/or take you down (metaphorically or literally). That being said, let it be known that I support anyone who wants to be truly free and works to do so. People just need to open their eyes to both the macro and micro level and be prepared to get down and dirty with the beast.

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avatar Gwendolyn G

What I don’t understand is that some of us have had credit with these companies for years and consistently paid and maintained very low balances and CC companies are still lowering our available balance. I had a friend that American Express lowered her balance to zero and forced her to make payment arrangements due to the new signed bill. They ruined her credit and she was paying monthly for years. One of my creditors states that the bill is reduced to the available balance because the new bill will only allow them to offer certain credit limits to individuals and my student loans put me over the limit they can offer me. The bill doesn’t state that any place. It is really ruining people’s credit that paid ontime to have their debt-to-income affected severely like this.

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