Are credit card late fee’s going away? Not entirely. The Consumer Financial Protection Bureau (CFPB) has proposed a new rule to ease up the cost of credit card late fees for consumers. Here’s what you need to know.
CFPB Proposes to Limit Credit Card Late Fees
Credit card late fees are not ideal on top of the likely drop in your credit score. Credit card late fees cost Americans $12 billion every year. Meanwhile, major credit card issuers profit off of late fees and other junk fees they charge card members. The Consumer Financial Protection Bureau (CFPB) finds this practice to be a loophole exploited by credit card companies to raise fees with inflation. However, the CFPB is proposing a new rule for late payment penalty fees.
Currently, credit card companies can incur a late payment fee as high as $41. The new proposed rule would ensure the over-the-top late fee amounts become illegal. The new proposed rule was issued on February 1st of 2023 along with a request for public comment. See the rule below:
Credit Card Penalty Fees (Regulation Z)
The Consumer Financial Protection Bureau (Bureau) proposes to amend Regulation Z, which implements the Truth in Lending Act (TILA), to better ensure that the late fees charged on credit card accounts are “reasonable and proportional” to the late payment as required under TILA. The proposal would (1) adjust the safe harbor dollar amount for late fees to $8 and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type; (2) provide that the current provision that provides for annual inflation adjustments for the safe harbor dollar amounts would not apply to the late fee safe harbor amount; and (3) provide that late fee amounts must not exceed 25 percent of the required payment.
Why Credit Card Companies Are Protected
Credit card companies have been able to hike their fees with inflation because of an in-place immunity provision. Due to this provision, credit card companies also do not face collection fees. With the new proposal, the CFPB estimates it will save American families as much as $9 billion per year on credit card late fees.
“Over a decade ago, Congress banned excessive credit card late fees, but 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. “Today’s proposed rule seeks to save families billions of dollars and ensure the credit card market is fair and competitive.”
Card Late Fees and How They Work
If you have ever been late for a credit card payment, then you know those late fees waste no time rolling in on your statement. CFPB explains in their press release for the proposed rule, that the amount credit card issuers are charging for late fees is excessively more than the actual cost of collecting the late payment.
The late fees typically occur within a few hours of missing the payment which is not needed to discourage late fees. Additionally, the late fees may not be justified in relation to the consumer’s conduct in paying late. In other words, the punishment may not fit the crime. Also, the late fee may not be the only penalty the cardholder incurs. Card members might also lose their grace period on paying interest. Or the late payment may result in a lower credit score dependent upon how long the late payment lasts.
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What Will Change?
CFPB’s proposed changes would amend the regulations implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act).
Proposed changes:
- Lower the immunity provision dollar amount for late fees to $8
- End the automatic annual inflation adjustment
- Cap late fees at 25% of the required minimum payment
In addition, the proposal also seeks commentary on other potential changes to CARD Act regulations:
- Whether the changes should apply to all credit card penalty fees
- whether the immunity provision should be eliminated altogether
- whether consumers should be granted a 15-day courtesy period, after the due date, before late fees can be assessed
- whether issuers should be required to offer autopay to make use of the immunity provision
The Bottom Line
In 2020, credit card companies charged approximately $12 billion in late fees. The total late fees charged account for 10% of all credit card interest and fees charged to consumers. All of which are significant numbers for the pockets of consumers. The requested commentaries, if addressed, will only add to the benefit of the consumer.
Featured image by Vadym Petrochenko/Getty Images
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