Credit Card Accountability Responsibility and Disclosure Act: Definition, Example, and FAQs
The Credit Card Accountability Responsibility and Disclosure Act of 2009, commonly known as the CARD Act, is a landmark piece of federal legislation within the broader category of consumer protection law. It was enacted to safeguard consumers from unfair and deceptive practices by credit card issuers. The CARD Act fundamentally reshaped the landscape of consumer credit in the United States by mandating greater transparency and establishing substantive protections against practices that often led to unexpected fees and escalating debt.
History and Origin
Prior to the CARD Act, the credit card industry operated with fewer restrictions, often employing practices that were opaque and challenging for the average consumer to understand. These included arbitrary increases in interest rates, late fees, and complex terms hidden in fine print. Concerns over mounting consumer debt and a lack of clear disclosures prompted calls for reform. The Credit Card Accountability Responsibility and Disclosure Act was passed by the U.S. Congress with bipartisan support and signed into law by President Barack Obama on May 22, 2009.45 Its provisions were primarily designed to amend the Truth in Lending Act (TILA), a foundational law governing consumer credit disclosures.42, 43, 44 The majority of the CARD Act's key provisions took effect nine months later, in February 2010.41
Key Takeaways
- The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) significantly reformed the U.S. credit card market to protect consumers.
- It introduced new rules regarding interest rate increases, credit limits, fees, and payment allocation.39, 40
- The CARD Act mandates clearer disclosures on billing statements, including information on how long it takes to pay off a balance making only the minimum payment.36, 37, 38
- The legislation also implemented specific protections for young consumers and restricted certain marketing practices aimed at those under 21.34, 35
Interpreting the CARD Act
The CARD Act is interpreted as a comprehensive framework that shifts the burden of clarity and fairness onto credit card issuers. It ensures that consumers are given sufficient notice for changes in terms, particularly regarding interest rate adjustments. For instance, issuers must provide at least 45 days' advance written notice before increasing an annual percentage rate (APR) or making other significant changes, with limited exceptions.32, 33 This allows cardholders time to react, such as opting out of the new terms by closing their account and paying off the existing balance under the old rate.31 The act also streamlined how payments are applied, requiring payments in excess of the minimum to be allocated to the balance with the highest APR first, thereby helping consumers reduce their interest burden more effectively.30
Hypothetical Example
Imagine a consumer, Sarah, has a revolving credit card with a balance of $3,000, with portions at different interest rates due to past promotions. Before the CARD Act, her issuer might apply her entire payment to the lowest interest rate balance first, or even retroactively raise her interest rate without much notice.
Under the CARD Act, if Sarah pays $200, and her minimum payment is $50, the additional $150 must be applied to the portion of her balance with the highest APR. Furthermore, her monthly statement now clearly shows how many months it would take to pay off her entire $3,000 balance if she only makes the minimum payment, along with the total interest she would incur over that time. This transparency empowers Sarah to make more informed decisions about her payment strategy.
Practical Applications
The CARD Act has several practical applications across the financial landscape, primarily aiming to foster a more equitable relationship between consumers and credit card companies. It has notably reduced "gotcha" fees, such as unexpected over-limit fees, by requiring consumers to "opt-in" for such charges.28, 29 Without an opt-in, transactions that would exceed a credit limit are simply declined instead of incurring a fee.26, 27
The legislation also brought consistency to billing cycle practices, mandating that statements be mailed at least 21 days before the due date and that payments are credited promptly.25 This prevents issuers from manipulating payment deadlines to trigger late fees.24 A 2015 report by the Consumer Financial Protection Bureau (CFPB) indicated that the CARD Act helped consumers avoid over $16 billion in "gotcha" credit card fees.23 Similarly, an analysis from the Federal Reserve Bank of San Francisco found that the CARD Act successfully reduced borrowing costs, particularly for those with lower credit scores.22
Limitations and Criticisms
Despite its benefits, the Credit Card Accountability Responsibility and Disclosure Act has faced certain limitations and criticisms. Some financial industry groups argue that the CARD Act has led to higher interest rates for new borrowers and potentially reduced the availability of credit, especially for subprime lending borrowers or those with limited credit histories.21 The argument suggests that to offset lost fee revenue, issuers increased other costs. While some studies found no evidence of offsetting interest rate increases for new borrowers, the Federal Reserve Bank of Philadelphia found that the average ratio of credit limit on cards to total consumer debt declined for non-prime borrowers after the Act, suggesting a potential adverse effect for this group.19, 20
Additionally, some consumer advocates contend that the law does not go far enough in curbing certain practices. For example, some perks used to market cards, such as rewards programs, remain largely unregulated. The law also generally does not apply to business credit cards. The long lag time between the act's approval and its full implementation raised concerns that banks might take preemptive actions to disadvantage cardholders, although studies found no widespread evidence of this regarding account closures or worsened terms.17, 18
Credit Card Accountability Responsibility and Disclosure Act vs. Truth in Lending Act
The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) is often discussed in conjunction with the Truth in Lending Act (TILA) because the CARD Act is an amendment to TILA. TILA, enacted in 1968, is a broader federal law designed to promote the informed use of consumer credit by requiring clear disclosure of loan terms and costs, such as the annual percentage rate and finance charges.16 It applies to various forms of consumer lending, including mortgages, auto loans, and credit cards.15
The CARD Act, passed in 2009, specifically focuses on and significantly enhances consumer protections related to credit card accounts. While TILA established the foundational disclosure requirements, the CARD Act added substantive new rules that actively restrict certain credit card practices rather than solely relying on disclosure.13, 14 For instance, TILA required the disclosure of interest rates, but the CARD Act went further by restricting how and when those rates could be increased on existing balances.11, 12 Essentially, the CARD Act built upon TILA's framework to provide more robust safeguards against abusive practices in the credit card market.10
FAQs
Q: What are the main protections offered by the Credit Card Accountability Responsibility and Disclosure Act?
A: The CARD Act provides key protections such as banning retroactive interest rate increases on existing balances, requiring 45-day advance notice for rate changes, limiting fees (like late and over-limit fees), eliminating double-cycle billing, and ensuring payments exceeding the minimum payment are applied to the highest interest rate balance first.7, 8, 9 It also offers specific safeguards for consumers under 21.6
Q: Does the CARD Act apply to all types of credit cards?
A: The CARD Act primarily applies to consumer credit card accounts. It generally does not apply to business or commercial credit cards.5
Q: How did the CARD Act impact college students?
A: The CARD Act made it more difficult for individuals under 21 to obtain a credit card without demonstrating independent income or having a co-signer.3, 4 It also restricted credit card companies from marketing directly to students on college campuses with free gifts.2 This was aimed at promoting greater financial literacy and preventing young adults from accumulating excessive debt early in life.1