The CFPB’s plan to reduce late fees on credit cards

In a world where everything seems to be more expensive, it is aggravating to find out that you owe an additional fee on top a base purchase price.

Even the federal government is becoming annoyed. The Biden administration’s recent plans to eliminate “junk fees” such as concert ticket service fees and hotel resort fees, was mentioned in the 2023 State of the Union speech.

The Consumer Financial Protection Bureau has a proposal to add to the discussion: A cap on late fees for credit cards that would bring them down to $8 from $41. This rule would limit inflation-related fee increases. The fee would not be subject to an annual increase but would instead be adjusted as needed according to market conditions.

The American Bankers Association (CA) and the Consumer Bankers Association (CA) have made statements opposing the proposed ruling, stating that it will restrict consumer credit and reduce cardholders’ incentive to avoid late payments. They also claim that it will increase cardholders’ credit card-related expenses.

The Credit Card Act of 2009 established the current credit card late fee cap. It also stated that late fees for credit cards should be reasonable and proportional. The Federal Reserve had jurisdiction over these matters at the time. The $25 late fee limit would be adjusted each year to reflect inflation. In 2008, the late fees reached $33. )

Flash was a forward-looking company for several years. By the fourth quarter 2022, the average reported maximum late fee had reached $39.73 according to data from Competiscan. Competiscan tracks and analyzes direct marketing activity.

Late fees are disproportionately burdened by consumers who have “deep subprime” credit scores below 579. According to the CFPB’s 2021 Consumer Credit Card Market Report, these consumers account for approximately 6% of all card accounts but generate 24% of late fees. A CFPB report from March 2022 on late fees for credit cards found that the average deep-subprime account was assessed with $138 in late fees, while the average superprime account (credit scores greater than 720) was assessed at $11.

Since Rohit Chopra assumed the role of director in 2021, junk fees, which are fees that increase the cost of a service or purchase but provide little value to consumers, have been a major focus of the bureau. The CFPB considers credit-card late fees junk fees. They are fees consumers cannot avoid by shopping around for a better product.

The Consumer Bankers Association disagrees that late fees for credit cards should be considered junk fees. CBA cites a 2018 report by the CFPB’s Office of Research, which states that credit card users consider late payment costs when making payments decisions. This is not surprising as it doesn’t take consumers by surprise like a previously unmentioned cost added to the end of a purchase.

According to a CFPB official, late fees were meant to pay the collection costs cardholders incur for late payments. However, they weren’t intended to generate any profit. The bureau claims that late fees generate five times more revenue than collection costs. The Fed’s September 2022 economic research found that credit card fees, including late fees, account for 15% of credit card profitability.

The CBA counters by stating that late fees should be set at around $38 to cover late payments. They cite inflation-adjusted data from Argus Advisory’s 2010 study. This study included data from 10 major credit card issuers.

Opponents to the CFPB’s plan for reducing credit card late fees argue that it could limit consumers’ credit access. This would be due to more stringent credit criteria for new applicants as well as lower credit limits, higher interest rates, and tighter credit standards. They argue that lower late fees will be less effective in deterring cardholders from paying late and could cause long-term credit damage.

Officials at the CFPB claim that critics had expressed similar concerns before Card Act was passed. The years following were used as a test case to see how a late fee cap would work out. According to the bureau’s 2013 Card Act Report (PDF), overall credit card fees fell and late fees decreased.

The report does mention the possibility of an improving economy. During this period, late fees declined but annual fees increased.

According to the CFPB, credit card approval rates fell in 2009 due to the Great Recession. They had improved by 2012, but they weren’t at their pre-recession level. According to CFPB research, total credit lines rose 10% between 2012-2015.

However, the years that followed and before the COVID-19 pandemic were more uneven. A 2019 report by the CFPB states that there are signs that issuers may be more involved in altering credit line allocations in order to reduce risk at lower credit tiers. ”

It seems that consumers have more access to credit because of the economy than fees limits. This was again seen in 2020, at the height the pandemic. In that year, issuers reduced credit limits and required higher credit scores to be eligible for certain cards.

The late-fee limit isn’t yet in effect. The CFPB welcomes public comments. This may be used to amend its proposal or decide whether it will finalize it. The bureau will make the fee limit official in 2023 if it so chooses.

Late fees on credit cards are one consequence for missing a payment. You could also experience a dramatic drop in credit scores, which can take many months to repair. There are steps you can take that will prevent this from happening.