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Credit Card Reform

President Obama signed the Credit Card Reform act (officially called the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009) last week and I’d like to offer my thoughts. First, let’s review the rules that will be put into place under this legislation:

  1. Institutions would be prohibited from treating a payment as late unless the consumer has been given a reasonable amount of time to make that payment. A safe harbor provision suggests that statements must be mailed 21 days in advance of the account’s due date. If the due date occurs on a day the postal service doesn’t operate, the payment may not be considered late if received on the next business day.
  2. When different interest rates apply to different balances, payments must be allocated according to a new method. The bank wil no longer be permitted to apply the entire payment only to the lowest interest balance.
  3. Banks would be prohibited from increasing the interest rate on existing balances. This doesn’t apply in the case of a variable rate tied to an index, nor the expiration of a teaser rate.
  4. Banks may not assess an over the limit fee due solely to a hold placed on available credit.
  5. Banks would be prohibited from double-cycle billing, i.e. calculating interest due based on prior months’ balance.
  6. Banks would be prohibited from financing security deposits or fees for the issuance or availability of credit if those deposits or fees ulitize the majority of available credit on the account.
  7. Banks making firm offers of credit advertising multiple annual percentage rates or credit limits would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest annual percentage rate and highest credit limit advertised.

These are the major points contained in the 269 page pdf, available from the treasury web site (Note – The document may not open in some vbrowsers, right-click if you wish to download and read it). Now, let’s look at what isn’t addressed and the unintended consequences of this legislation:

  1. Grace periods – there is nothing here to stop banks from charging on one’s daily balance (as banks do with HELOCs.) As banks feel the squeeze on their bottom line, it would be simple to do away with grace periods entirely, and any use of one’s card would accrue interest.
  2. Annual Fees – I have a number of credit cards, all of which I pay in full each month, so the interest rate is of little concern so long as the grace period is in effect. The only card that carries an annual fee is the one that offers me airline miles. I suspect that moving forward, few cards will offer no annual fee.
  3. Reduced rewards – One card I carry offers a 2% rebate into a 529 (college saving) account. With no fee, this card is a no brainer to use. I’ll expect a letter soon that the reward percentage is being reduced.
  4. Reduced/Canceled credit lines. Self-explanatory, but perhaps the worst of the potential results. Remember, as I discussed some time ago, your Credit Score (FICO) is made of of multiple factors, one of which is credit utilization (the percent of your outstanding line used). So, you may only owe $3000 on a card with a credit line of $10000, and think all is well. But the bank then reduces your available limit to $5000, and now your percent used has doubled, possibly impacting your credit score.

This is one story I am certainly going to follow, as we all have an interest (pun intended) in its outcome.


  • JOE May 26, 2009, 4:31 pm

    The regulations address late fees, along with over the limit fees, but the only reference to annual fees is when the fee itself is a disproportionately large percent of the credit offered, e.g. a $100 annual fee on a $250 credit line. If the customer doesn’t agree to pay the new annual fee, they can ‘not agree’ to the new terms, and pay the card off over time, but not using the card for new purchases.

    Your observation is dead on, the responsible will be hurt, and the irresponsible, saved from the problems they created for themselves.
    As always, thanks for visiting.

  • Nick May 26, 2009, 3:48 pm


    If a card doesn’t currently charge an annual fee, does this bill allow banks to now charge a fee on existing accounts? Or is this only on new accounts going forward? As a result of this legislation, I agree that we are going to see fewer no fee cards, as well as banks doing away with grace periods all together.

    After reading your post and other on the web, it seems to me that this bill seems to hurt responsible users of credit cards more than it helps (similar to the housing legislation that was passed that hurt responsible mortgage owners).

  • Augustine May 28, 2009, 10:34 am

    And I guess that I got the results of such law before it was enacted: I had a card with no balance whose rate was raised from 7.99% to 17.99%! Thank you comrades for making me pay for those deadbeats!

  • JOE May 28, 2009, 8:26 pm

    Funny, Augustine, that “deadbeat” is the word used by the banks for us, those who pay in full each month, and therefore pay no interest. Again, thanks for visiting.
    Likely going to revisit this within the next couple weeks.

  • Robyn - CCD January 10, 2010, 7:38 pm

    Your unintended consequences list is interesting and it’s really disappointing if these become a standard response to the reform – especially the Reduced/Canceled credit lines and it’s credit score implications.

    “I had a card with no balance whose rate was raised from 7.99% to 17.99%! Thank you comrades for making me pay for those deadbeats!”

    I’d be interested to know here if that particular card abolished the grace periods as well, if you continue to not be a deadbeat and keep the zero balance the interest rate becomes irrelevant does it not?

    “Your observation is dead on, the responsible will be hurt, and the irresponsible, saved from the problems they created for themselves.”

    Since it has been a good while now since the legislation was passed have you noticed an open slatter worst outcome response from the lenders?

    Just saw – link to unintended consequences of CARD will go have a read

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