What is the Credit CARD Act of 2009? How the Legislation Impacts Consumers

Throughout my life, I’ve never had significant problems with my credit cards or card debt. That may be because I’ve had two big advantages: a good financial education and a career as a financial writer. 

But also, I’ve been lucky. Many people without my advantages have serious problems with cards and card debt. Those problems would almost certainly be much worse were it not for the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009.

The CARD Act is a federal law that protects consumers, like you and me, from a laundry list of harmful practices that were once standard operating procedures for card companies. These practices included unfair fees, unclear disclosures, and predatory marketing that targeted young people who often didn’t have much — if any — experience with credit. 

The CARD Act isn’t as complicated as it sounds, and in this article, I’ll break down its history, origins, and key provisions that matter to you. I’ll also summarize all of the protections you need to know about before applying for credit. 

These include restrictions on rate increases and over-limit fees and guidelines that aim to protect college students and other young consumers from excessive card debt. Individually, these protections are powerful. Taken together, they’re like superheroes.

One of the CARD Act’s most important provisions is the ability-to-pay rule. This rule requires card issuers to consider a consumer’s financial ability to make card payments before they open a new card account, extend a card loan, or raise a card credit limit for an existing card account for that person. 

The purpose of this rule is to help ensure that consumers aren’t approved for card debt if they don’t make enough money to repay it. The CARD Act also offers protections in many other vital areas to help consumers avoid a debt cycle.

Interest Rate Requirements

Before the CARD Act, card companies could increase the rates consumers were obligated to pay within months or even weeks after they obtained a new card. These rate hikes could be applied to existing card debt the consumer had already incurred, as well as to new purchases. 

Rate changes could occur for any reason, even for no reason at all, and advance notice of a rate increase was not required. If that sounds unfair to you, you’re not wrong. That was why the CARD Act prohibited most rate increases during the first year after an account was opened and strictly limited increases for existing card balances after that.

The CARD Act generally allows rate increases after the first year in which an account is open, for new purchases, and with at least 45 days’ advanced notice.

Consumers who received a notice of a permissible rate increase must also be informed that they had a right to cancel the card before the higher rate became effective. 

Although the CARD Act restricts rate increases, it doesn’t cap card rates. Maximum rates are determined by state law and can be quite high.

Fee Restrictions

Before the CARD Act, card companies could process transactions that exceeded a card’s credit limit and charge the consumer an over-limit fee for that service.

The CARD Act didn’t prohibit over-limit transactions, but it banned any fees associated with this service unless the consumer opted in to the service in advance. If the consumer didn’t opt-in, the card company could choose to decline an overlimit transaction or process it, but without charging a fee.

A 2022 CFPB report found that as a result of the CARD Act, over-limit fees had become “practically nonexistent.”

At one time, card companies could employ a practice known as “double-cycle” or “two-cycle” billing. With this approach, a consumer’s balance from the previous month was used to calculate interest charges for the current month. 

In effect, consumers who paid their balance in full in one payment period could be charged interest for that balance in the next payment period. The CARD Act banned this practice, which tended to unfairly inflate interest charges.

The CARD Act doesn’t prohibit cards with low credit limits or high fees. However, it does restrict how high certain fees can be as a percentage of the card’s credit limit in the first year the account is open.

Specifically, certain fees, in total, cannot exceed 25% of a card’s credit limit in the first year after the account is opened. The rule includes monthly or annual fees, among others, but doesn’t include late fees, over-limit fees, insufficient funds fees, or fees charged before the account is opened.

The 25%-of-credit-limit rule helps to ensure that consumers can’t be charged unreasonably high fees for new cards with relatively low credit limits.

Payment Allocation Rules

Before the CARD Act, if a consumer made an extra payment, the card company could apply the amount to any portion of the unpaid balance, including the portion with the lowest interest rate. This lowest-rate-priority strategy maximized the interest the consumer would be obligated to pay even after the extra payment was applied.

The CARD Act eliminated this practice and instead required card companies to apply extra payments to the highest-rate portion of the unpaid balance first. Any additional amount of payment can then be applied to the portion of the unpaid balance with the next-highest rate, and so on.

Card companies used to mail monthly card statements to consumers with very little time for them to make a payment. This strategy could catch those who were unaware of it off guard and result in late payments, which triggered higher rates and fees.

The CARD Act requires card companies to mail monthly statements to consumers at least 21 calendar days before their payment is due. The due date must be printed on the statement, and it cannot be a Sunday or holiday, cannot change from month to month, and cannot involve an early morning or middle-of-the-day cut-off for making the payment on time.

The CARD Act was signed into law by President Barack Obama in 2009, but it wasn’t the federal government’s first attempt to regulate the card industry. 

In fact, the Federal Reserve had adopted regulations that prohibited some card practices and mandated better card disclosures for consumers five months earlier, in December 2008. 

History and Origins

The CARD Act went further, subjecting card companies to additional restrictions and requirements. I remember these years well. They were very chaotic as the U.S. economy nearly collapsed and then fell into the Great Recession.

The CARD Act restricts rate increases and fees for consumer cards, requires specific disclosures, and creates special protections for younger card users. The act didn’t stop there; it also created significant penalties that can be imposed on companies that fail to comply with the rules.

Federal government regulators got new responsibilities in the CARD Act, too. They’re required to prepare periodic reports for Congress about their enforcement of consumer card protections and request public comment about trends in the card market.

The federal Consumer Financial Protection Bureau (CFPB) published the most recent mandatory report in October 2023. These reports enable journalists and financial writers, like me, to keep the public informed.

Key Provisions

The CARD Act introduced numerous protections for credit card users, but these protections were made available only for consumers, not small businesses or corporations. 

Those types of cards weren’t included in the legislation. This point is important not just for small businesses but also for freelancers, like me, and other gig workers.

Who could argue with any of that?

In fact, the CFPB’s 2013 report found that four years after the CARD Act became law, those goals appeared to have been met to at least some extent.

The report stated that the costs consumers paid for cards had become “more closely related” to the card’s annual fees and interest rates, which were more clearly disclosed.

Better disclosures enabled consumers to decide whether or not to charge purchases with more confidence that if they did, the cost would reflect the card’s current interest rate rather than another, higher rate that the issuer might choose to impose at an unknown later date for any or no stated reason, according to the report.

The report also found that the CARD Act appeared to have had a “discernible impact” on credit availability. Fewer card accounts were opened for college students and other consumers younger than 21 years old. 

“At least some of these limitations on access to credit appear to be intended consequences of the CARD Act’s stated objective of creating fair and transparent practices with respect to open-end credit,” the CFPB report stated.

Round of applause, please.

Prior to the CARD Act, consumers often had difficulty understanding their card accounts’ complicated repayment terms. To create greater clarity, the act required card companies to include some specific disclosures in their card statements.

Clearer Monthly Statements

It can be hard to decipher a monthly credit card statement, much less do the calculations needed to know when your account will be paid off. That’s why the CARD Act requires the following disclosures:

• The length of time necessary and the total interest cost to pay off the existing balance by making only the minimum payment every month.
• The payment amount necessary and the total interest cost to pay the existing balance in full in 36 months.

Though the CARD Act significantly restricted card rate increases and fees, it didn’t ban penalties, including fees or higher rates for late payments. Instead, it allowed card companies to charge only reasonable late fees.

In 2010, the Fed issued a regulation that allowed late payment fees that either only covered the card company’s costs associated with the late payment or were no more than $25 for the first late payment and $35 for each subsequent late payment.

Due to inflation adjustments, those maximums increased this year to $30 for the first late payment and $41 for each subsequent late payment. In March, the CFBP, which is now responsible for these rules, tried to lower the maximum to $8 and end the automatic inflation adjustments for the biggest card companies.

Unfortunately, these changes were put on hold due to litigation. I wish I could tell you if the lower maximum fees will become effective and, if so, when, but at this time, neither if nor when is clear.

Changes to Credit Card Agreements

The CARD Act further requires that card companies provide consumers with card agreements that disclose terms in plain language rather than legalese. Clear disclosures of fees and other terms must be provided when the card account is opened and on periodic card statements.

The CARD Act also requires that card agreements explain the card’s rates and terms for the first year in clear language — so we can all understand it. Promotional rates must continue for at least six months and must be clearly disclosed as temporary.

Historically, card companies have printed their card agreements on paper and in very small print and sent them to consumers through the U.S. Mail when they opened an account. The CARD Act requires the companies to make these agreements publicly available on the internet as well.

The online copies may be more convenient for consumers and can also be accessed by government regulators and consumer advocates so they can monitor the terms of the agreements and evaluate whether the disclosures are adequate.

Younger consumers may be more willing to take financial risks, especially if they don’t know the long-term consequences of debt. The CARD Act includes protections to help shield young people from some questionable credit card marketing tactics.

Age Restrictions and Requirements

Before the CARD Act, card companies aggressively marketed credit cards to college students and other young adults, even if they didn’t have significant income or assets or much experience with credit. As a result, many ended up with more card debt than they could manage financially.

To curtail this problem, the CARD Act prohibits companies from issuing cards to consumers who are younger than 21 unless they demonstrate that they have an independent financial ability to make the required payments or a parent or other adult who has the ability to make the payments agrees to be a co-signer.

Marketing Restrictions

The CARD Act also restricted the practice of sending pre-approved offers of credit to people younger than 21 and prohibited their use of freebies, swag, or other gifts of tangible items, such as T-shirts, Frisbees, or pizzas, to induce students to apply for cards on or near campuses or at school-sponsored events. 

I’m old enough to remember that prior to the CARD Act, these marketing strategies were common card company practices at the university I attended.

The CFPB’s 2013 report found the CARD Act’s ability-to-pay rule and its restriction on preapproved offers and campus marketing likely contributed to a “substantial decrease” in the number of new cards issued to students and other young adults after the CARD Act became law.

While it’s not easy for me to disentangle all the positive effects of the CARD Act from other changes in the card market, it is clear to me that the act created a wealth of protections for consumers who use credit cards. 

The new rules banned or severely restricted unfair rate hikes, unclear disclosures, unexpected or unreasonably high fees, questionable marketing tactics, and other harmful practices, making cards financially safer for consumers to use for the next 15 years and counting.