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What CARD Act Will Mean for the Cards in Your Wallet

The Credit Card Accountability, Responsibility, and Disclosure Act, or CARD Act, was passed by Congress and signed into law in 2009 by President Obama, and went into effect on February 22, 2010. The bill created changes for almost every credit card, but how it affects you specifically depends on what sorts of cards you carry. There are 10 major types of credit cards, and this guide will let you know exactly what changes to look for with the one(s) you have or plan on getting.

0% Introductory Rate Cards

A feature used in the past by many card issuers to attract new customers has been the offering of cards with very low interest rates for the first year. These interest rates have often been as low as 0% to 2%. Many with higher-rate cards use this feature to transfer balances from higher-rate cards over, eliminating or greatly reducing their interest payments on existing debt.

The CARD act creates severe limitations on the flexibility of card issuers to change rates, especially on existing debt.  

The CARD act creates severe limitations on the flexibility of card issuers to change rates, especially on existing debt. As such, to retain profitability many card issuers will raise introductory rates much higher. While some of the very low introductory rates may remain available to those with excellent credit, for most the days of saving money by rolling balances to new cards are probably largely over.

Cards for College Students

You can expect many fewer college students walking around with big credit card balances, and probably even credit cards at all into the future. Marketing programs previously used by card companies to target young people, such as setting up a stand at a university and offering free food, have been banned. Even more significantly, the CARD Act requires that any student who is under 21 must either prove an independent source of income or have their application co-signed by an adult over 21. Even when a student does get a card, it will have a lower limit and higher interest rate than it would have had before.

Subprime Credit Cards

The word “subprime” may be more commonly associated with recent real estate foreclosure disasters, but in reality all it refers to is any sort of loan issued to a person who, for one reason or another, suffers from a poor credit rating or is otherwise considered a greater risk for lending. While this type of card has seen an even more significant drop in issuance than other types, you may still be one of those who holds this sort of card, or may wish to apply for one in the future.

This sort of cards have been known in the past for “fee harvesting”, that is, requiring relatively large up-front payments and small credit limits to compensate the lender for taking on the extra risks associated with a particular borrower. While perhaps sound in concept, in practice these fees have often been seen as excessive. Given the recent recession, many of the lower-income or otherwise poor-credit borrowers have found themselves more dependent than ever on these cards, and for them these high costs can be damaging.

Business Cards

The CARD Act was geared towards consumer cards, and so business cards, frequently used to help make purchases for small business, received none of the protections other sorts of cards did. It is unknown whether any future legislation will address these cards, or whether they will remain competitive with personal cards, since personal cards can be used for business transactions as well.

Debit Cards

Overdraft fees have, in the past, been a major source of money from debit cards in the past. By making what was effectively a loan to the card holder when their account balance went negative, the banks could legally charge a fee that was sometimes several times the overdraft amount. The CARD act protects card holders from this practice by mandating that they must first opt in to allow overdraft charges. If you don't opt in, when you try to charge more than is in your account, the transaction will simply be rejected. While this may cause some minor embarrassment, it could save you substantial money over the long-run.

Debit cards have never been the most profitable enterprise for banks, and with this source of income taken away, they will likely try to find other ways to generate revenues from this service. Whether these will be fees on existing accounts or for additional services, or something else, only time will tell

Gas Cards

Gas cards are not directly addressed by the CARD act, but there will be some likely effects specific to them, nonetheless. The most popular form of gas card is actually results from a partnership between a bank and an oil company. Using such a card promotes loyalty to that particular oil company, and as such they frequently offer rewards to their users. These are often in the form of fuel credits, where the customer gets a few cents credit towards future purchases for every gallon of gas purchased. Because the new law and an overall more risky credit environment means card issuers must be more closely guarded with revenue streams, many of these rewards may be reduced to lower costs.

Low Fixed Interest Rate Cards

In an effect already well-noted by the media, many companies raised rates significantly and lowered credit limits in anticipation of the CARD Act going into effect. With much less flexibility in raising rates, credit card have taken these steps to reduce their risk. Low, fixed interest rates such as have been seen in the past will likely only be available to entice the most valuable customers, those with high credit scores and high balances who make regular payments and use their cards very frequently. Almost everyone else now has to deal with much higher interest rates on existing cards, and can expect the same from any future card offered.

Gift Certificates and Prepaid Cards

Prepaid cards, gift certificates, and gift cards have historically sometimes carried such penalties as inactivity fees which they did not have to disclose before purchase. Many expired in a year or even less after purchase. The CARD Act forces the disclosure of many possible fees prior to purchase, and mandates that they not expire for a minimum of five years.

In the past, many of us have gone into a retailer intending to use a gift card, only to find it has expired. Every dollar that went unused by prepaid card holders was a dollar the issuer gained essentially for free. The fees were also a source of income, but now that they must be disclosed, issuers may find they discourage the purchase of prepaid cards. In order to compensate, some prepaid cards may start imposing higher fees to open an account, as well as raising fees to “recharge” spent cards.

Reward Cards

Credit cards that offered special rewards were originally created for mass appeal. During the boom, issuers wanted as many customers as possible to sign up. Now, between the CARD Act and the economic turmoil, credit card companies are being much more cautious about who they want to issue cards to. As such, card issuers have started to use more targeted rewards programs, not just to attract any customer but the specific sort of customer they want. Given the tightening in other areas, however, you can expect these rewards programs to be a little less generous than before.

Conclusions

The CARD Act was ostensibly intended to protect consumers, and it is probable that it will do that, at least for some. However, the near term effects for many will not be entirely pleasant, and will include higher interest rates and less availability of credit. What it all ultimately means for the cards in your wallet is that you'll have to learn to use them less.