What is the purpose of the CARD Act?

The CARD Act has one overriding purpose. It was adopted to “protect consumers from unreasonable credit card practices.” Along with this lofty goal, its intent is to encourage – nay mandate – that credit card companies cease and desist some practices that are unfair to consumers and disclose many other account terms in more understandable ways.

Since its passage, the CARD Act has, in the short term, influenced many credit card companies to increase interest rates, reduce credit limits, or, in some cases, close consumer accounts, including those with high maximums, superior payment records, and strong personal cash flow.

Odd, you say? While they may appear to be bad decisions, these actions will make more sense if you examine the issues from the card companies’ position. Some of the most important consumer provisions (see below) project to reduce credit card company gross income. Like the tired business joke, “I lose money on every item I sell, but I make it up in volume,” some card companies believe they will lose money on some of their best cardholders.

Since the first credit card was issued, the ideal borrower is one who charges heavily and maintains a “mature” and ongoing large balance. Those who charge heavily and then pay down (or pay off) their balances regularly can become costly to the card issuer, since they have little opportunity to generate consistent finance charges.

The CARD Act encourages cardholders to manage their card balances closely, make more than minimum monthly payments, and refuse costly increases in interest rates and fees.

The 5 most important provisions of the CARD Act

The CARD Act is not perfect. Has there ever been a perfect piece of legislation? Probably not. The purpose of the Act is laudable, and the important provisions are valuable. Most provisions would not be needed if credit card companies had simply adhered to existing legislation, particularly Regulation Z (Truth-in-lending).

By creating fees for almost everything and quietly raising interest rates whenever they wanted or needed higher income, credit card companies legally circumvented the intent of then-existing lender-borrower regulations.

If you want to consider this activity as using available “loopholes” in consumer borrowing legislation, you might deem the CARD Act as an addendum that attempts to close these legislative “holes.” Here are the five provisions, in no particular order, that are the most important to consumers:

1. Interest rates on existing balances cannot change

Credit card companies CANNOT change (increase) interest rates on existing balances.

This is the most important and decisive provision of the CARD Act. However, should a cardholder be more than 60 days late with their payments, their card company is no longer bound by this provision and can increase the interest rate.

2. Card holders can decline rate changes

Should a credit card company announce an interest rate change on new balances, consumers may DECLINE the increase.

This is a wonderful provision, but it comes with a price. Should you politely decline to be subject to a new, increased interest rate, your card company may decide (politely) to simply close your account.

3. Monthly statements must be revamped

Monthly statements must contain easy-to-read information.

Revamped statements must include information concerning paying off balances, making minimum payments, how long (at minimum payment levels) it will take to pay off the current balance, and what it will cost to pay off the current balance.

This is one of the least popular provisions with most credit card companies. Showing you that it might take longer to pay off your credit card account than your new 30-year mortgage if you make only minimum payments may spur you to increase your monthly contribution.

4. Overlimit fees are prohibited

Credit card companies are prohibited from charging “over-limit” fees.

These fees were an excellent source of income for card companies. Along with this, cardholders may lose something, too. When you compare credit cards, you may have the option to allow over-limit purchases and accept the associated fees.

Should you accept the new provision as-is, your card company will probably decline your next over-limit purchase. At a minimum, know your card balance level and credit limit before trying to make purchases.

5. Card holders must be notified of any changes to an account

Consumers must receive a minimum of 45 days’ notice, clearly printed and written, of any changes to their credit card account.

Consumers have always enjoyed this provision. However, new terms often went unnoticed because they were not clearly displayed or were inserted in mailings that looked like advertising or solicitations.

Consumers should open and read every communication from their card companies to learn of any changes to their account. These notices, presented at least 45 days in advance, give you the option to decline or take other action.

Implementation of the CARD Act

Card companies must implement the CARD Act, which was signed into law on May 22, 2009, by August 22, 2010 (many of the law’s provisions had to be met by August of last year and February of this year). It’s not perfect, but it does offer you more protection against undesirable changes in your credit card accounts.

These provisions also give you the ability to compare credit card offers smartly. Use these provisions to evaluate credit card deals, credit card rates, wisdom of balance transfers, and the real value of credit card rewards. Determine if low interest credit cards are as attractive as they appear, based on their other terms.