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Congress Passes Credit Card Reform Legislation

Dennis Cuevas, Project Director and Chief Counsel, Consumer Protection

According to the Federal Reserve, consumers owe $973.5 billion on their credit cards, which translates to $3,186 of credit card debt per person, or $8,282 per household.

Typically, consumers who possess several credit cards use them frequently, and have to carry a balance from one month to the next because they are unable to pay each card off in full when the bills come in.

Over the past few years, recent bank practices impacting credit card fees, interest rates, and payment dates have created a national outcry from consumers and consumer advocates. The Center for Responsible Lending estimates that at least 10 million cardholders have seen their interest rates increase significantly in the past several months through no fault of their own. In response, Congress turned the public outcry into public policy by passing historic credit card reform legislation. The legislation, signed into law by President Obama on May 22, gives lenders nine months to implement reforms to their current practices.

Dubbed the “Credit Card Accountability, Responsibility and Disclosure Act,” it addresses several aspects of credit card interest rates, fees, and practices. For example, the legislation:

  • Prohibits card companies from increasing interest rates on existing balances, with a few exceptions[1]. Credit card companies cannot raise interest rates retroactively on balances accrued before a rate increase takes effect unless the cardholder is more than 60 days late in paying the bill.
  • Prohibits card companies from employing universal default. Card issuers cannot increase a cardholder’s interest rates on existing balances based on adverse information not related to card behavior.
  • Prohibits card companies from charging over-the-limit fees when cardholders set their own credit limits. Customers must affirmatively agree to allow over- limit transactions.
  • Prohibits card companies from using “double-cycle” billing or imposing interest charges on any portion of a balance that is paid by the due date.
  • Prohibits card companies from charging a fee for any payment method that is allowed except for expedited service provided by a service representative.
  • Requires card companies to apply payments proportionally to the entire balance or to be applied to the balance with the higher interest rate first.
  • Requires card companies to provide 45 days notice for rate increases to cardholders, thus allowing cardholders to pay off existing balances or transfer balances and shop for another credit card
  • Requires card companies to mail bills at least 21 days before the due date and credit payment as “on time” if they are made before 5 pm on the due date, which could be extended to the next business day for mailed payments when the due date occurs on Sunday, holidays or other days that companies do not receive mail.

Lastly, the legislation addresses what some consumer groups have labeled “irresponsible and aggressive” marketing to young consumers, especially marketing to college students. It prohibits credit card issuers from extending credit to consumers younger than age 21 unless the person can show an ability to repay or provide a co-signer.

In sum, the new law will provide consumers with some relief from questionable credit card practices. It will provide more upfront disclosures about how consumers will be charged, and restrict how credit card issuers alter fees and interest rates after a customer has signed up for a card.

[1] The increase is under a variable interest rate or it is the end of the promotional period for the promotional rate.

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