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Federal regulators are slashing credit-card late-payment fees.
The Consumer Financial Protection Bureau finalized a rule on Tuesday that caps credit-card late fees at $8, a fraction of what most issuers typically charge.
The rule is part of a broader campaign within the Biden administration taking aim at so-called junk fees. The rule has been sharply criticized by card issuers and lobbyists, who say fees that low don’t cover the cost of customers falling behind and won’t do enough to deter credit-card users from making late payments.
The new cap on late fees may be small compared to what the average consumer is paying in interest. Most credit cards currently charge well over 20% in interest, and the average credit card balance was $6,864 in the fourth quarter of 2023, according to personal-finance site LendingTree.
“Given the levels of credit card debt in the economy, making a late payment cheaper than buying popcorn at the movie theaters does not help consumers,” said Kelvin Chen, head of policy at the Consumer Bankers Association.
More on credit-card debt (November 2023): Is America’s record credit-card debt a red flag for the economy? ‘The trends are definitely not good.’
Regulators say the new rule capping late fees is a win for consumers, who will no longer have to contend with expensive penalties when they’re already struggling to make credit-card payments.
The rule has been in the works since early last year — but it’ll probably be a while before you see charges on your credit-card bill shrink.
Here’s what you need to know about the rule, and when — or if — you can expect changes to go into effect.
Why is the CFPB taking action on credit-card late fees?
In addition to interest and other charges, credit-card providers also typically charge a late fee for failing to make the minimum payment on your balance by the due date. Those late fees typically range from $25 to $40, according to LendingTree.
The CFPB, the nation’s top consumer watchdog agency, has said those charges are excessive and hurt consumers who are already struggling financially.
“It isn’t based on what their cost is, it’s based on how much they can charge people,” Ira Rheingold, executive director of the National Association of Consumer Advocates, told MarketWatch before Tuesday’s ruling.
Regulators have estimated that the income generated by the largest card issuers from late-payment fees is about five times greater than the collection costs incurred by missed payments.
Credit-card companies collected about $14.5 billion in late-payment fees in 2022, the CFPB said.
“This should not be a profit center for banks,” Rheingold said.
How does the CFPB’s new rule impact credit-card late fees?
The CFPB’s finalized rule reduced the typical late payment charge from $32 to just $8, which the agency has argued is sufficient for credit-card companies to cover related collection costs.
The new rule applies to only the largest credit-card issuers — those with more than 1 million open accounts.
Those issuers can charge fees above the $8 threshold if they can prove the higher fee is necessary to cover their actual collection costs, the agency said.
Read this next (from January 2024): Want to get rid of your credit-card debt in 2024? Here’s your action plan.
For the millions of Americans who are behind on their credit-card payments, the ruling could save them about $220 a year, according to the CFPB.
Why are credit-card companies opposed to the CFPB’s rule capping late fees?
Card issuers have argued that reducing late fees would hurt consumers.
Lenders would have to make up the lost revenue in other ways, Chen said, leading to a higher cost of credit for all customers, including those who pay their bills on time.
It could also lead banks to limit the credit they extend to potentially risky card users — like those with lower credit scores, he said.
“Credit cards are one of the best and primary ways to pull people into the banking system and help them build credit,” he said, adding that banks have “worked hard” to expand that access to credit in recent years. “When you do things like this [policy], you handicap a bank’s ability to do that.”
How will the new rule on credit-card late fees impact consumers?
Though the rule is slated to take effect soon, it may take longer for consumers to their late-payment fees shrink.
It’s a “virtual certainty” that the rule in its current form will run into legal challenges, according to Kristen Larson, a consumer-financial-services attorney at Ballard Spahr.
The U.S. Chamber of Commerce said Tuesday that it plans to sue the CFPB over the rule. “Once again, the Consumer Financial Protection Bureau has exceeded its authority,” said Neil Bradley, the Chamber’s head of strategic advocacy, in a statement. “The agency’s final credit card late fee rule punishes Americans who pay their credit card bill on time by forcing them to pay for those who don’t.”
Meanwhile, credit-card companies haven’t made any adjustments in anticipation of the regulation.
“I don’t believe the market has priced in the implementation of this rule,” said Ed Mills, a managing director and Washington policy analyst at Raymond James.
The CFPB proposed a new rule on bank-account overdraft charges this year that would require financial institutions to offer more disclosures about overdraft fees and potentially limit the charges to as little as $3. That rule isn’t expected to take effect until October 2025 at the earliest.
The timeline for a change in credit-card late charges remains a question mark, Mills said — especially given the CFPB’s track record.
“There is a long tradition of the CFPB proposing something and it not necessarily going into effect in the time or manner in which the market initially reacted to,” he said. “It becomes a bit of a ‘show me’ story.”
How have credit-card late fees or your credit-card bills affected your life and how you think about the U.S. economy? MarketWatch wants to hear from you. Let us know at readerstories@marketwatch.com. One of our reporters might reach out to you to learn more.
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