Credit Cards Slashing Late Fees? Prepare to Pay for It Elsewhere

Late fees are a great source of income for credit card companies.

President Joe Biden has pulled together a host of government agencies to help promote competition in the U.S., thereby driving down consumer prices. One thing the president has set his sights on is exploitative junk fees, like those charged by credit card companies.

To that end, the Consumer Financial Protection Bureau (CFPB) proposed this month to reduce the amount credit card issuers can charge for late payments to $8. Currently, consumers who pay a credit card late are charged $30 for the initial late payment and $41 for each subsequent penalty. In 2020 alone, these penalties put an additional $12 billion into the pockets of credit card issuers.

Fighting the proposal

The CFPB rule, which does not require congressional support, has drawn the ire of credit card companies and trade groups representing those companies. The new ruling will save consumers an estimated $9 billion annually if enacted.

In addition to setting individual late fees at $8, the proposal will:

• End automatic annual inflation adjustments
• Limit late fees to 25% of the minimum payment

Lobbyists for credit card companies are pushing back, threatening that banks and credit unions will be forced to increase interest rates, tighten lending standards, and reduce access to credit if the ruling is carried out.

The argument

According to lobbyists, late fees help financial institutions manage risks. If financial institutions cannot charge expensive late fees, they will be forced to raise prices across the board. Celia Winslow, a senior vice president at American Financial Services Association, warned that rewards programs could be limited, as well as the amount of credit available to consumers.

According to Rohit Chopra, director of the CFPB, card issuers have made late payment penalties a "core part of their business model." Further, Chopra says that credit card companies have been allowed to profit from junk fees thanks to the safe harbor provision under the CARD Act of 2009.

The hardest hit

The consumers hit hardest by late fees are the most economically vulnerable. A report by the CFPB found that it's subprime and deep subprime cardholders who are most susceptible to late fee charges. In addition, the number of late fees charged to households with lower credit scores declined in 2020 and 2021 after stimulus checks arrived. According to the CFPB study, these late fees appear to be a penalty on households living paycheck-to-paycheck rather than a form of incentive to pay on time.

Not budging

Still, banking trade groups are not budging, arguing that lower fees would make borrowing more expensive for everyone. President and CEO of the Consumer Bankers Association, Lindsey Johnson, refers to the CFPB proposal as "unfortunate and puzzling."

If the new late fee regulation is enacted, the CFPB says that consumers should begin to notice a difference as soon as 2024. In the meantime, banks and their representatives in Washington will continue to fight the proposal. To date, their most pointed weapon is the threat to find new ways to make consumers pay for the estimated $9 billion they will lose in late fees.