Are high credit card late fees harmful or protective to consumers?

Credit card late fees have also increased in a period of inflation that has driven up prices for nearly all goods and services. A clause of the Credit Card Act 2009 allows credit card companies to increase late fees. Over time, these fees have increased to maximums up to 41 dollars.

Consumer Financial Protection Bureau has recently proposed a new rule which would reduce the maximum late fees for credit cards by 75% to just $8. Some people argue that while lower fees might seem good for consumers, they could actually do more harm. The American Banking Association says that a fee reduction will result in “more late payments, more debt, and lower credit scores .”

Late payments are damaging to your credit rating, and can affect how you access credit or pay interest. Late payments, as they accumulate due dates for payment, can cause debt to escalate. This escalation of debt is particularly concerning, as a study conducted by TransUnion in the first quarter 2023 shows that credit card debt has reached near record levels and is up nearly 20% from year to year.

According to the CFPB, credit card companies use late fees not to improve people’s financial well-being but to boost their profits. Federal Reserve 2022 report shows credit card charges, including late fees, account for 15% of credit card profits. According to the CFPB’s 2021 Consumer Credit Card Market Report this cost is borne by customers with the lowest incomes. According to the report, subprime or deep subprime customers paid over $4 billion in late charges in 2019. They represented only 12% of all accounts.

It’s crucial to keep in mind that while lobbying groups like the ABA might have a good point regarding the dangers long-term of lower late charges for consumers, they are biased. Scott Gilpatric is a University of Tennessee behavioral economist who has a specialization in self-control and procrastination. He says that credit card companies don’t want to create a system in the consumers’ best interest. The companies are trying to maximize profits .”

Late fees can help reduce the impact of missed payments, but they are not the only solution. The CFPB argues new digital notifications can deter late payers in place of steep fees. This policy is now obsolete.

Wei Zhang, assistant deputy director of CFPB’s Office of Consumer Credit, Payments, and Deposits Markets, said that “the vast majority of card holders are enrolled online, and almost two thirds of them use a smartphone app to manage their cards.”

The consumer can also see their credit score, which allows them to monitor the effect of late payment in real-time. Zhang explains that this is a strong incentive for consumers to pay their bills before the due date, separate from any fees they may have been charged.

Experts question if increased notifications and monitoring of credit scores alone will be enough to deter late payers. According to a survey commissioned by the ABA in 2022, 46% of respondents cited avoiding a fee as their top reason for paying on time. A survey conducted by the ABA in 2022 showed that 83% of respondents felt that a late fee of $10 would not be enough to stop them from paying their credit card bills late. This argument is supported by data from NerdWallet’s Consumer Credit Card Report. According to a survey by The Harris Poll for NerdWallet conducted in March 2023, Americans that would have missed a credit-card payment said that an average late fee of 30 dollars would keep them from doing so.

Gilpatric points out that, while a drop in credit scores is more damaging to the consumer over a late fee of $30 on the short term, this long-term effect doesn’t always drive consumer behavior.

Gilpatric says that if issuers really wanted to discourage late payments they could use stronger measures. He argues that if your card is deactivated the minute you’re late with a payment, it would serve as a strong wake up call.

You can avoid late fees by taking proactive measures, including:

Setting reminders for your due dates will prevent late payments, whether you use your calendar or the one provided by your credit card company.

By enabling automatic payments, you will never have to pay late fees again. Set your automatic payment to the minimum amount due and pay your balance separately when you have the money.

It’s worthwhile to ask for a waiver if you have been charged a fee by an issuer. Some companies will waive the late fee if you ask.