Credit Card Default Laws & Regulations

While credit card companies and collectors are entitled to attempt to collect what is owed to them, there are limits to the actions credit card companies are able to take against delinquent card holders. Also, with new regulations set to come into effect in 2010, the federal government has made sweeping changes in credit card laws, interest rates and charges, which could result in a decrease in credit card defaults.

What is Credit Card Default?

In most instances, a grace period applies to most credit card balances or minimum payments. When payments are not received during the grace period, with some exceptions, the account is considered late and eventually goes into default. In many instances, credit card companies close defaulting holders' accounts.

Universal Default

An increasing number of credit card agreements include a practice known as "universal default." With universal default, a credit card company has the option of raising interest rates on an account, even if that particular account is current. Such decisions are usually made as a result of credit card holders being late or missing payments on another credit card company or utility bill. In some cases, "universal default" is applied when the credit card company simply believes the card holder has too much overall debt.

Consequences of Credit Card Default

Credit card default is considered a matter of civil law rather than criminal law, unless fraud was involved. Also, since credit card debt is considered unsecured debt (except for secured credit cards), a credit card company cannot repossess merchandise purchased with a defaulted credit card. However, the company is entitled to seek a judgment against credit card holders in default, which can have adverse affects on credit reports for up to 10 years.

Regulations on Credit Card Collections

Regulations put limits on their contacts with customers. Calls are limited to specific hours during the day, and contact cannot be made at a person's workplace if the delinquent customer has made a request not to receive calls at work. Contact cannot be abusive or of a harassing nature, and third parties cannot be contacted by the credit card company or collection agency unless prior permission has been given by the cardholder.

Statute of Limitations for Credit Card Default

The statute of limitations on collections of delinquent credit card accounts varies from state to state, and ranges up to 10 years. If the credit card company files a lawsuit and wins a judgment, the judgment has a separate statute of limitations for the credit card company (or collection agency), which can range up to 20 years in many instances. However, it is unlikely that companies will take on the expense and effort of a lawsuit for small balances.

The Federal Trade Commission Act and the Truth in Lending Act

In December 2008, the Federal Trade Commission issued sweeping changes in regulations concerning credit cards: the Federal Trade Commission Act (FTC Act). Disclosures for credit cards were also changed under the Truth in Lending Act, with both acts set to take effect in 2010. Under this new legislation, credit card companies will be prohibited from making unannounced interest rate changes. The regulations also forbid interest rate charges using the "two cycle billing method" (where charges from two different billing cycles are used to compute a payment due, usually resulting in a higher payment); require a reasonable amount of time for consumers to make payments; and limit fees imposed on sub-prime credit cards.

Resources

• Federal Reserve Board: Protections for Users of Credit Cards and Overdraft Services
• Debt Smart Credit Card Rules Adopted by Federal Regulators
• Card Report: Credit Problems