A new rule from the Consumer Financial Protection Bureau (CFPB) will limit how much most credit card companies can charge customers who make late payments. The typical late payment fee will drop from $32 to $8, saving American families more than $10 billion annually, the CFPB estimated.

The CFPB considers late fees of more than $8 to be “excessive,” one of the “junk fees” the Biden administration has vowed to eliminate.

President Biden announced the new rule at a meeting of his Competition Council. The average savings, he said, will be $220 for the more than 45 million Americans who typically pay late fees.

“We estimate banks are generating five times more in late fees than it costs to collect late payments,” Biden said. “They’re padding their profit margins.”

The nation’s bankers and the U.S. Chamber of Commerce have filed a lawsuit asking a federal judge to block the rule, claiming it would cause “irreparable harm” and reduce the availability of credit.

Congress banned excessive credit card late fees when it passed the Credit CARD Act of 2009, but credit card companies have “exploited a [regulatory] loophole to harvest billions of dollars in junk fees from American consumers,” said CFPB Director Rohit Chopra.

Credit card companies have been “hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines,” Chopra said.

Late fees, which have been going up since 2010 (when they averaged $23), have become a major revenue generator—currently $14 billion annually. For some large credit card companies, late fees “are a major driver of their profit model,” the CFPB said. In some situations, they can be as high as $41.

The new rule has three major components:

  • Caps late fees at $8: Based on market data it collected, the CFPB believes a late fee of $8 is sufficient for credit card companies to cover collection costs incurred as a result of late payments.
  • Eliminates automatic inflation adjustments: Credit card companies will no longer be able to automatically adjust their late fees each year based on inflation. Going forward, the CFPB will monitor market conditions and adjust the $8 late fee as necessary to account for increased expenses.
  • Requires credit card issuers to show their math: Card issuers could charge more than the fee cap set by the CFPB, as long as they can prove the higher fee is necessary to cover their actual collection costs.

The new rule does not eliminate late fees. It simply limits them to what the government considers “reasonable and proportional,” as required by the CARD Act. Credit card companies will still be able to raise interest rates, reduce credit lines, or take other actions to deter late payments.

The CFPB said it hoped the rule will “increase the desire for credit card companies to facilitate on-time payment, since it would lower incentives to build a business model on late fees.”

Consumer Groups Applaud the New Rule

“It’s fair for banks to recoup the costs associated with late fees. It’s not fair for them to take advantage of consumers who have no options to fight back,” said Ed Mierzwinski, senior director of U.S. PIRG’s Federal Consumer Program.

Adam Rust, director of financial services at the Consumer Federation of America, said the CFPB’s new rule “prioritizes the needs of cash-strapped households ahead of big bank profiteering.”

Chi Chi Wu, senior attorney at the National Consumer Law Center, said the fee cap will “help the balance sheets of millions of households stretched thin by record high housing costs and other expenses.”

Banks Sue to Have Late Fee Rule Killed

On March 7, two days after the CFPB’s rule was finalized, the American Bankers Association, Consumer Bankers Association, the U.S. Chamber of Commerce, and three other business groups filed a lawsuit in federal court challenging the new rule and asking the court to grant a preliminary injunction to stop it from going into effect later this year.

In a joint statement, the plaintiffs claim the CFPB “exceeded its statutory authority, and offered deficient analysis and reasoning, to achieve a pre-ordained outcome that will ultimately harm the consumers it is charged with protecting.” They also claimed the $8 cap on late fees is below the actual cost of covering those late payments.

Rob Nichols, president and CEO of the American Bankers Association, claimed the new rule “would result in more late payments, increased debt, reduced credit access and higher APRs for all consumers—including the vast majority of cardholders who pay on time each month.” Nichols said $8 does not cover the “actual costs” resulting from late payments.

The Consumer Bankers Association (CBA) warns that a late fee cap would penalize cardholders who pay their bills on time, as bankers find ways to recoup that lost revenue.

“This final rule will benefit a small minority of frequent late-payers by offsetting the costs of their late payments by increasing costs amongst the 74 percent of cardholders that pay their bills on time,” CBA President and CEO Lindsey Johnson said in a statement.

What’s Next?

Unless stopped by the court, the rule will take effect in mid-May. The rule will apply to any credit card companies with more than one million open accounts. These companies account for more than 95 percent of all outstanding credit card balances.

Checkbook Tips

Regardless of the late fee, it's important to pay your credit card bills on time, every time, even if you only make the minimum payment. A late payment will dramatically lower your credit score.

If you normally pay on time but slip up and make a late payment, the credit card issuer might waive the fee, if you ask nicely. A 2020 survey by Bankrate.com found that 82 percent of those who asked for a credit card late fee to be waived got at least some relief.

“You can’t do this every month, of course,” said Ted Rossman, Bankrate’s senior industry analyst, “but card issuers will usually give you a break if it’s an isolated event.”

More from Checkbook: Federal Regulators Cracking Down on Hidden Fees


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Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He has been protecting consumers for more than 40 years, having covered the consumer beat for CBS News, The Today Show, and NBCNews.com. You can also find him on Facebook, Twitter, and at ConsumerMan.com.