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On Friday May 22 President Obama signed the landmark Credit Card Accountability Responsibility and Disclosure Act, or better known as the CARD Act. The CARD Act is meant to protect consumer from the abusive acts of credit card issuers. It becomes enforceable law at the end of February 22, 2010, a full five months earlier than similar protections adopted by the Federal Reserve, which would have gone into effect in July 2010.
A highlight of the new law and its provisions is as follows:
Gift Card Longevity - Today gift cards have descending value, meaning that as the gift card remains unused the balance can be reduced a few percentage points each year. This self-reducing balance is important to the card issuer, especially if they are publicly traded because of current accounting rules that prevent a company from claiming the revenue until the card is actually redeemed.
What this means is that if you buy a $500 gift card from an Apple Store and never use it, Apple cannot claim that $500 as revenue despite having the $500 in the bank. This is why many companies reduce the value of unredeemed gift cards over time. Under the new CARD Act a gift card cannot be reduced in value for a full five years.
There are studies that have shown that the longer the "safe harbor" period for gift cards the less likely they are to be redeemed. So, it seems as if the lawmakers may have gone the wrong way with this provision. Think about it from a consumer perspective. If you have a gift card that expires in 7 days aren't you more likely to use it quickly rather than a card that retains its full value for five years?
Under 21 Marketing Restrictions - Today you just have to be over the age of 18 in order to obligate yourself to a credit card agreement. That will change under the CARD Act. In fact, you will now have to be 21 years old starting next March if you want to apply for a credit card. An exception will be made for those who can prove that they have the capacity to make credit card payments and for those who can convince a parent to co-sign for them.
This is a "good news/bad news" provision in that it prevents consumers from establishing credit at 18. This costs you a full three years of credit history and credit experience, both of which are essential to someone who wants to build up his or her credit scores. Now someone who can't find a parent willing to co-sign will have to wait until they turn 21 before they can get their credit career started. An obvious question to ask would be "exactly what happens between the ages of 18 and 21 that all of a sudden indicates that a consumer has learned the value of proper credit management?"
The good news is that many students who would have ended their college career with a nice degree and a ton of credit card debt will now end their career with just the degree. According to a study performed by Sallie Mae in 2008 found that 84% of college undergraduates had a credit card. And, the same study found that the average senior carried more than $4,100 after graduation. Both of these numbers will surely decrease with the new law.
Prevents Double Cycle Billing - Most credit card issuers have scrapped this practice voluntarily but the new law makes it official. Double cycle billing is the practice of using your average daily balance for the current and most recent past billing cycle and use that figure to determine finance charges. It's complicated but safe to say that if you carry a balance from one month to the next then this method costs you more interest.
Longer Guaranteed Grace Period - Today many issuers are reducing grace periods, which is the number of days after your bill is mailed before it is due. This is the "free loan" period. If you pay your balance in full before the grace period ends then you've just enjoyed a free short-term loan.
Many issuers were reducing this grace period to 14 days, which caused many consumers to miss payments because their due date would fall between paychecks. The longer grace period guarantees that you will be paid at least once before their bill comes due, assuming you're employed.
Prevents Universal Default - Universal Default is the practice whereby a credit card issuer adversely changes the terms of your credit card account because of your actions with another lender. Today credit card issuers practice universal default and then publicly decry the practice, depending on which way the wind is blowing.
Allows Consumers To Control Over-Limit Spending - This provision allows consumers to avoid over-limit fees. In fact, a consumer would have to contact a credit card issuer and proactively opt in to allow over limit transaction approval. Otherwise the issuer will decline the transaction while you're standing at the register or waiting for the waiter to return with the bill. Fees represent a multi-billion dollar revenue stream for credit card issuers. This provision will cost them big time.
Allows Consumer to Earn Back Lower Rates - Consumers who have gone 60-days past due can still see their credit card interest rates increased. This act, according to the American Banker's Association, is meant to punish a consumer for doing something that they didn't want them to do, which is the pay late. This allows credit card companies to still punish the delinquent consumer but it also allows the consumer to earn back their lower rate if they can make their payments on time for six months. Today all you can do is ask for your rate to be returned to its lower baseline.
This provision also guarantees that your rate will not increase for the first year after you've opened a credit card account. And, if also guarantees that promotional rates have to last at least six months. This provision is neutral and doesn't benefit either side.
So there you have it, the CARD Act. Still the best way to not have to concern yourself with legislative protections is to not have credit card debt. Doing so makes many of these provisions interesting but not applicable.
:)
Matt
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