Proposed Rule Would Curb Excessive Credit Card Late Fees
Last updated February 8, 2023
Credit card late fees cost American families about $12 billion a year, and 75 percent of that revenue has no purpose “beyond padding the credit card companies’ profits,” according to the Consumer Financial Protection Bureau (CFPB).
On Feb. 1, the bureau proposed a rule that would cap ever-increasing credit card late fees at $8 and require financial institutions to justify future price hikes.
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Most large banks currently charge customers as much as $30 for the first late payment and $41 for subsequent missed payments—the maximum amounts allowed under current regulations—while most smaller banks and credit unions charge a maximum late fee of $25 or less, according to CFPB data.
The CFPB estimates that the revenue generated from late fees at the largest credit card companies is approximately five times greater than the actual collection costs incurred in dealing with those delayed payments.
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 that has allowed them to escape scrutiny for charging an otherwise illegal junk fee,” said CFPB Director Rohit Chopra.
This loophole created what Chopra called a “multi-billion-dollar bonanza” that “punishes and penalizes consumers” when they make mistakes.
“While it might be fair to charge customers for extra costs that credit card companies are incurring, that’s not what we see here,” he said. “We worry that credit card companies are actually hoping that consumers are a day or two late.”
Late Fees Would be Limited, Not Eliminated
Chi Chi Wu, staff attorney at the nonprofit National Consumer Law Center points out that the proposed rule does not eliminate late fees. It just limits them to what’s “reasonable and proportional,” as required by the CARD Act. The proposed rule would also eliminate the two-tiered fee structure. The maximum penalty for all late payments would be $8.
The CFPB says its proposed rule would reduce late fees by as much as $9 billion a year. If finalized, it would:
- Set a new baseline for late fees. The CFPB said it believes a late fee of $8 would be sufficient “to cover the collection costs incurred as a result of late payments” in most cases. Companies would be able to charge more if they could prove the higher fee is necessary to cover their incurred collection costs.
- End the automatic annual inflation adjustment. Credit card companies have used this provision in the current rules to hike fees with inflation, even if they faced no additional collection costs.
- Cap late fees at 25 percent of the required minimum payment. Currently, a card issuer can charge a late fee equal to 100 percent of the minimum payment owed by the cardholder.
Consumer groups support the rulemaking. Rachel Gittleman, Financial Services Outreach Manager at the Consumer Federation of America, said it would “profoundly impact consumers and their financial well-being,” especially those with subprime credit and consumers of color.
The American Bankers Association blasted the agency’s proposal, calling it “extreme,” and claiming it would “harm consumers” by reducing competition and access to credit.
“If the proposal is enacted, credit card issuers will be forced to adjust to the new risks by reducing credit lines, tightening standards for new accounts, and raising APRs for all consumers, including the millions who pay on time,” said Rob Nichols, ABA president and CEO in a statement.
The National Consumer Law Center (NCLC) also supports the proposed rule. Wu said she doesn’t take the industry’s dire warnings too seriously. Bankers always claim regulations will drive up interest rates and shut off credit, she said, but lots of credit cards are still being offered.
You can comment on the proposed rule by sending an email to [email protected] Include Docket No. CFPB-2023-0010 in the subject line.
What About Establishing a Grace Period?
The CFPB also asked for comments on a potential rule change that would give credit card customers a 15-day grace period after the due date, before late fees can be assessed. It would bring credit cards in line with other credit and payment obligations, such as rent and mortgage payments, which provide some leeway.
Ted Rossman, senior industry analyst at Bankrate.com, likes the idea.
“It’s important to remember that your credit score isn’t dinged until you’re 30 days late. A late fee, on the other hand, could be assessed the minute the deadline passes,” Rossman said. “So, a 15-day grace period before the late fee kicks in would represent a compromise of sorts between those key deadlines.”
Some banks already give customers a day or two (sometimes more) to pay their bills before they are charged overdraft fees. The 15-day grace period for credit card payments would be a “consumer friendly” change, Rossman said.
Note: It you’re normally a good customer and you slip up by making a late payment on your credit card bill, the credit card issuer might wave the fee, if you ask nicely, Rossman told Checkbook. A Bankrate survey in 2020, 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,” Rossman said, “but card issuers will usually give you a break if it’s an isolated event.”
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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.