New Protections for Consumers  -- But What About Businesses?

The Credit Card Accountability, Responsibility and Disclosure Act -- called, appropriately enough, the CARD Act for short -- was signed into law on May 22, 2009. This new federal legislation is designed to provide greater protection to consumers without shutting off credit opportunities. Most of the changes do not go into effect until February 22, 2010.

Good News for Parents of College Students in the New Law     Parents of college students received some good news in the new credit card law. It will soon be more difficult to lure students on campuses to sign up for credit cards if they have no income.     Under the new law, a person under the age of 21 cannot be issued a credit card unless: It's determined that he or she has the independent financial means to pay the bill. A parent, guardian, or individual over 21 becomes a co-signer.     In other words, students with no income (other than from Mom and Dad) won't be given credit cards that their parents don't know about.     The law also prevents card issuers from using incentives like free food or clothing to entice students to sign up for cards -- a standard practice on college campuses today.     Another plus: A co-signer must give permission before the credit card limit is increased.     Although these changes will help protect students, parental co-signers should be aware that the joint liability terms apply to all of the debt created by the account -- not just half. However, over the years, many parents have wound up paying off their children's credit card bills anyway to protect their credit ratings.     What about affinity cards that are branded with university logos and marketed using personal information obtained from schools? The new law requires colleges and card issuers to disclose more information about affinity transactions between colleges and credit companies, such as contracts, terms and conditions.     Beware: Since the new changes don't generally go into effect until February 22, 2010, expect aggressive credit card marketing towards college students during the upcoming fall semester.

Consider Offering a Cash Discount     There are several reasons why some businesses encourage credit cards, despite the fact they must pay interchange fees, which average 2 percent on each purchase. Studies show that when people pay with credit, they buy more than if they use cash. Plus, with credit sales, merchants see a reduced number of bad checks, lower billing costs and fewer cash thefts.     The new credit card law is designed to protect consumers from unfair credit practices. However, all of this protection could come at a price. Frequent flyer miles or rewards points could be reduced or eliminated in the wake of the new law. Annual fees, which have not been charged by many issuers in recent years, may be reinstated.     Businesses may see a backlash against credit card use by some customers once the new law goes into effect -- especially those who use credit responsibly and pay off their bills in full each month. To counteract the effects of such a backlash at your business, consider offering customers a cash discount or giving away promotional bonus items. It may entice people to spend more and will cut your transaction fees.

Here's a brief overview of the five main areas addressed in the new law:

1. Unfair rate increases. One of the key new law changes ends the practice of surprise interest rate hikes by credit card companies and other institutions. Effective August 20, 2009, issuers must provide at least 45 days written notice to cardholders of an increase in the annual percentage rate. Furthermore, cardholders will no longer be blindsided by high rate hikes on existing balances. The new law prohibits such actions for "any reason" and also limits increases due to late payment.

Similarly, the terms of the credit agreement must be spelled out clearly and generally remain constant for the entire first year. Although companies can continue to offer promotional rates to new or existing accounts, these enticements must remain in effect for at least six months.

2. Late fees and other charges. Under the new law, credit card companies must allow cardholders at least 21 calendar days from the mailing date to pay off the charges, extending the billing period by seven days. The new law also bans late fee "traps" like weekend deadlines, monthly changes in due dates and deadlines falling in the middle of the day. Fees on sub-prime, low-limit credit cards will be substantially restricted.

To reduce "over-the-limit" fees when credit thresholds are exceeded, companies must obtain a cardholder's permission to process transactions that exceed his or her personal limit.

Gift cards issued by retailers, restaurants and other businesses: The new law requires greater disclosure on fees for gift cards and restricts inactivity fees (unless the credit card has been inactive for over a year), as well as expiration dates. The terms of dormancy fees and expiration dates must be clearly disclosed.

3. Plain language disclosures. Credit card contracts must contain language that is easily understood by consumers. Before opening accounts, cardholders should receive disclosures of the terms and clear statements of activities going forward.

For example, statements should prominently display fees paid in the current month and year-to-date, as well as the reasons for them. To ensure that these disclosures remain helpful, they must be tested regularly and updated as needed.

4. Information about credit and payment decisions. Issuers of credit cards will be required to inform consumers about the consequences of their decisions. This includes providing statements that show how long and how much it would take to pay off a balance by making only the minimum required payments. Statements should disclose the monthly payment amount needed for cardholders to pay off the balance in 36 months.

In addition, if a financial institution issuing cards accepts payments in person at its branches, it must credit accounts on the day the payments are made. (Some institutions wait until the next business day, which has resulted in late fees for cardholders.)

5. Accountability. The new law emphasizes accountability from both credit card issuers and the regulators responsible for enforcing the provisions. For example, credit card companies are now required to make contracts accessible online, as well as in a hard copy.

Finally, the new law significantly increases the penalties for failures in these areas, reaching a maximum of $5,000 per violation.

What About Corporate Credit Cards?

While the new law provides the above protections for consumers, it does not extend them to traditional corporate cards. (There was an amendment that would have expanded the credit card safeguards to businesses with fewer than 50 employees, but it did not pass.) However, small business owners who use their personal cards for business purposes will be covered by the new credit protections.

The Future

There is a possibility of more credit card reform in the future. In signing the law, President Obama noted that:

• Credit card debt has increased by 25 percent in the U.S. over the past decade.
• Nearly half of all Americans carry a balance on their cards, with the average amount totaling more than $7,000.
• One in five Americans carry a balance that has been charged interest of more than 20 percent.

Part of the new law calls for the Federal Reserve Board to examine the business use of credit cards and report to Congress on its findings and recommendations next year. The law also requires regulators to report to Congress regularly on enforcement of the protections, credit card trends and potential consumer issues.

"We will continue to press for reform that is built on transparency, accountability, and mutual responsibility -- values fundamental to the new foundation we seek to build for our economy," President Obama said.

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