Credit Card Practices Given a Major Make-Over (Including Gift Certificate Protections)

At the end of last year, Americans' credit card debt reached almost $1 trillion total, with the average card-holding household owing $10,679 (Nilson Report, April 2009). In the last 12 months, 34 million Americans have made a late credit card payment and 18 million have missed a payment entirely. (National Foundation for Credit Counseling, 2009 Financial Literacy Survey, April 2009).

In an effort to ease the burden on struggling cardholders, the federal government has passed the Credit Card Accountability Responsibility & Disclosure Act of 2009. The law becomes effective next February and contains numerous protections for cardholders, some of which are highlighted below.

No More Retroactive Interest Rate Hikes. Card issuers will no longer be able to raise interest rates on existing balances unless you are more than 60 days late on your account (i.e., no payment is received during the 60-day period after the due date). Instead, rate hikes will only apply to new purchases. Further, even if the rate is increased due to a late payment, the issuer must reinstate the lower rate after the cardholder has made six straight on-time monthly payments.

Payments Must Be Applied to Highest-Rate Balances First. Typically, card issuers apply payments to the balance subject to the lowest interest rate, thus increasing the total accrued interest and the time it takes to pay off the entire balance. Once this law takes effect, the issuer must apply any payments above the minimum to balances subject to the highest interest rate, then the balance subject to the next highest, and so on down the line.

No Payment-Based Fee. Banks will no longer be able to charge a fee related to the method of payment (i.e., no more fees for internet or telephone payments).

Set Payment Due Dates and Longer Grace Periods. The new law requires that the payment due date be the same day each month (or the next business day if the due date falls on a weekend or holiday). In addition, the billing statement must be mailed no later than 21 days before the payment is due, which is one week longer than the current laws impose.

Universal Defaults Prohibited. Currently, issuers can raise interest rates based on negative entries in a cardholder's credit report (i.e., if the cardholder has made a late payment to a different credit card). Card issuers will no longer be able to do so.

And finally, a Legal Report favorite:

Gift Certificates Shall Not Expire. Echoing California's law prohibiting the expiration of gift cards (see The Legal Report, Vol. 2, and our blog at, the new law prohibits the sale or issuance of gift certificates, store gift cards, or pre-paid cards that are subject to an expiration date and prohibits imposing dormancy fees, inactivity fees, or service fees on them.

Be Ready! In anticipation of the new law, card issuers have been taking steps to minimize the impact (i.e., raising interest rates, phasing out low-rate balance transfers, etc.). So, shop around for the best deals available now and keep an eye out for changes to your existing cards.

If you believe you have a case, contact our firm today by calling us at (888) 268-1565.