CARD Act Successes, Failures and Myths

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On February 22, 2011 the bulk of the Credit Card Accountability, Responsibly and Disclosure Act (CARD Act) marked its one-year anniversary.  Now that it has been around for over a year and fully digested by the credit industry, it’s time to take inventory on some of its successes and failures.  And, like you know I love to do, bust a myth at the same time.

Success: Identity theft is down, in part, because of the Act

Identity theft incidents were down 28% in 2010 from 2009, according to Javelin Strategy and Research.  And, the newly released “Top Consumer Complaints in 2010” statistics from the Federal Trade Commission show that the number of complaints about identity theft dropped from 278,078 in 2009 to 250,854 in 2010.  It’s still the number one complaint, but not by as much as in the past.  Debt collector complaints are catching up (shocking).

This is completely coincidental, but the CARD Act can take some credit for the reduction in identity theft incidents and complaints.  The Act made it illegal for credit card issuers to charge over-limit fees on credit card transactions that took your balance over your predetermined credit limit.  So, in reaction, the credit card industry simply declines those transactions because of their inability to hit you with the $35 over-limit fee.

What that meant was any thief who swiped your card and then tried to buy something expensive enough to take you over the limit was unsuccessful because the transaction was denied at the register.  In the past those same fraudulent transactions could have been approved because the card issuer could charge the fee. Thanks, CARD Act!

Failure: Advance notice is not required for account closures or credit limit decreases

Every once in a while I have a hard time writing about something because it seems so unbelievable.  This is one of those times.  The CARD Act requires 45-day advance notice for adverse changes to the terms of your credit cardholder’s agreement.  Sounds great, right?

The problem is that two of what I would define as being THE most adverse changes do NOT require any advance notice, at all.  The first is credit limit reductions.  The issuer is not required to give you any advance notice if they lower your credit limit.  They DO have to send you something if the reduction was done because of your credit reports or scores.  But that can come AFTER the limit has already been reduced.

The second is the account closure.  There is no requirement to notify you in advance that “Hey, we’re going to close your account in 45 days… HEADS UP!”  There is, again, an obligation to eventually notify you if your credit was the basis for their decision.

This was a win for the credit card industry because they feared that if you told someone about an upcoming closure or line reduction, they would charge up their card in advance.  I’m not sure I agree with them. I don’t know many people who would max their cards out of spite.

Myth: Universal Default has been eliminated

Universal default, the process where a credit card issuer jacks up your interest rate because of something you did with a completely different card, was handicapped by the Act — but not eliminated, as many believe. The only component of old-fashioned Universal Default that was eliminated was the retroactive interest rate increase, where they’d increase rates on existing balances. Thankfully, that has been eliminated.

Other components of UD still live on. If the card is over a year old then issuers can still increase your rates, for any reason, as long as they give you the 45-day notice. Worse, if your card has an expiring teaser rate or is tied to a moving index (the so-called “variable rate” card), then no notice is required before the increase.

So, if you miss a payment with your John’s Bank Credit Card, your Dave’s Bank Card can increase your rate.  And, if your FICO score drops, for whatever reason, they can all increase your rates as well.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow him on Twitter here.