The Consumer Financial Protection Bureau has finalized a rule to cut credit card late fees, with the federal watchdog agency reducing the typical charge from $32 to $8. More than 45 million people are charged late fees, the CFPB said, estimating that these customers will save about $220 a year on average from the regulatory change.
How big is the late-fee issue?
According to the CFPB, card issuers levied $14 billion in late fees in 2022, representing more than 10% of the $130 billion in total charges for fees and interest.
The new rule could shave those amounts by $10 billion.
Also, banks often apply late fees on top of other expenses consumers might incur including extra interest charges, loss of a payment grace period, negative credit reporting, reduced credit limits and higher interest rates on future purchases. The average cardholder carries a balance of more than $5,000, the agency said.
Are card issuers happy with the new rule?
Apparently not.
Rob Nichols, president and CEO of the American Bankers Association, issued a statement arguing that the new rule “will not only reduce competition and increase the cost of credit but will also result in more late payments, higher debt, lower credit scores and reduced credit access for those who need it most.”
Also, he argued that late fees play an important role in “promoting responsible consumer behavior.”
How did we get to this point?
The popularity of credit cards has been growing, and so have interest charges, fees and consumer debts.
Concerned about abuses, Congress passed the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which banned card companies from charging excessive penalty fees while establishing clearer disclosures. The CFPB contends that large credit card issuers have been exploiting a loophole in the law by hiking fees based on inflation.
Aren’t late fees needed to cover bank costs?
Yes. A 2010 regulation from the Federal Reserve, a prior credit card issuer, clarified that banks can charge late fees to the extent that they cover costs associated with a late payment, along with another provision that card issuers can charge up to $25 for the first late payment and $35 for subsequent payments, with both amounts adjusted for inflation. The CFPB contends those amounts have risen with inflation to $30 and $41, respectively, even though it said many issuers have embraced less-costly digital processes to deal with late payments.
Are all credit cards affected?
No. The new $8 late fee with no automatic inflation increases applies to card issuers having more than 1 million open accounts, though these companies weigh in with more than 95% of outstanding card balances.
Large issuers tend to charge slightly higher late fees, averaging $32, the CFPB said.
Where does the new $8 fee limit come from?
The CFPB contends that’s a sufficient amount that larger card issuers can charge to cover collection costs incurred from late payments, though companies may charge more if they “show their math” that higher fees are needed to cover collection costs, the agency said.
Can card issuers still raise interest rates and other charges?
Yes. Issuers still may boost rates, reduce credit lines “and take other actions to deter consumers from paying late,” the CFPB said.
Nichols of the American Bankers Association said the $8 cap is “far below banks’ actual costs” and will force card issuers to reduce credit lines, tighten standards for new accounts and raise interest rates for everyone, including those who pay on time. He characterized the credit card market as highly competitive and one that offers consumers a variety of popular programs and features.
Where can consumers learn more?
The CFPB website, consumerfinance.gov, provides more information on this and related issues. Complaints also may be lodged on the website or by calling 1-855-411-2372.
Reach the writer at [email protected].
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