Alan (not his real name), a parking lot attendant, bought a television and charged it to his credit card. He paid his bill faithfully every month for more than a year.
He was close to paying off the account when he miscalculated. His payment was $11 short. Even though he sent it in 12 days early, the credit card company waited until after the due date and then assessed him with hundreds of dollars of back interest and penalties. He apparently hadn't read the fine print of his credit card agreement – if he missed a payment, his interest rate would go up to 30%, retroactive to the date he bought the TV.
He kept making payments, but his balance barely budged. He mentioned his situation to an attorney who parked in his lot, who decided to take action. The attorney tried appealing to the merchant and the credit card company, to no avail. It took a nudge from a U.S. senator's staff member and the threat of a pro bono lawsuit by two legal firms to get the credit card issuer's attention. The bank finally decided that an honest mistake was made and dropped the interest and penalties as long as Alan made his final payment.
This kind of abusive credit card practice is what prompted passage of the Credit Card Accountability, Responsibility and Disclosure (Credit CARD) Act. Most provisions of the new law took effect in February 2010, but a few have been in force since August 2009. Others don’t take effect until August 2010. Here are some highlights of the protections for cardholders under the new law.
Effective Aug. 20, 2009, the Credit CARD Act required card issuers to:
- Give cardholders 45 days notice of interest rate, fee and finance charge increases.
- Mail statements at least 21 days before a payment is due.
Beginning Feb. 22, 2010, card issuers must:
- Extend promotional rates for at least six months.
- Apply payments that exceed the minimum to balances with the highest interest rates first.
- Keep the payment due date on the same day each month, or the next business day if the date falls on a weekend or holiday.
- Inform cardholders of the period of time and total interest it will take to pay off the card balance if only minimum payments are made.
- Require a co-signer for credit card applicants under age 21.
- Not increase rates, fees and finance charges during the first year that a credit card account is open.
- Increase rates and fees only under limited circumstances. This provision eliminates universal default increases (increases that result from the card issuer learning of the cardholder’s default on a different credit card or loan).
- Keep the terms governing repayment of an outstanding balance unchanged.
Beginning Aug. 22, 2010, card issuers must:
- Periodically review the factors that led to an increase in the annual percentage rate (APR), if they impose one, and reduce the APR if indicated by the review.
The law also increases protections for college students against aggressive credit card marketing, and requires colleges to publicly disclose arrangements they’ve made with card issuers.
This would be a good time to review the terms of your existing credit cards. According to creditcard.com, the average consumer has five open retail and bank credit cards. If you carry a balance, check the current interest rate and compare with other issuers.
If you've ever been burned by excessive late fees, sudden rate increases or undue penalties by a credit card company, the CARD Act should help prevent it in the future. You can also protect yourself by managing your credit wisely.