Oddly enough, getting socked with a late fee of up to $41 isn't all that unusual any more for consumers who are juggling their credit card bills.
The days of getting dinged by a $25 late fee on credit cards are long gone, if you somehow miss a payment.
On Tuesday, federal regulators moved to shut down a loophole that credit card issuers have used to push through higher late fees on credit cards. The Biden administration is out to reduce the typical late fee of $32 to $8.
Bankers say regulators are going too far, calling the move by the Consumer Financial Protection Bureau "misguided," "a flawed final rule," and an "arbitrary agency action."
The $8 cap on credit card late fees is "far below banks’ actual costs," according to a statement by Rob Nichols, president and CEO of the American Bankers Association.
Nichols said the low cap will drive "card issuers to reduce credit lines, tighten standards for new accounts and raise APRs for all consumers — even those who pay on time."
In his statement, Nichols noted that it is "highly unusual for a final rule to remain essentially unchanged from its proposal despite detailed stakeholder comments offering reasonable alternatives."
The ABA said it will consider all options to fight the rule.
Credit card regulations as they stand now are complex, which frankly prohibit many consumers from fully understanding them.
A great deal of fine print is outlined by credit card issuers in their "terms and conditions" for the card. That's where issuers spell out late fees on that card. You'll also see a "late payment warning" on your statement.
Take time to read the footnotes in those credit card agreements. Some issuers note that the late payment fee will not be higher than the total minimum payment due. And some issuers, like Bank of America, note that if your balance is $100 or less on the payment due date, you would not be charged a late fee.
Consumers, of course, must do all they can to pay bills on time to avoid damaging their credit scores. You'd pay a late fee if you don't pay at least the minimum due on or before the due date.
Many times, you're also able to call a credit card issuer to get a late fee removed if it's a one-time mistake. Or you might ask for some kind of relief. But many times, consumers don't even realize that they need to ask to have these fees waived and they don't make a call.
Bankers note that you can set up automatic payments now to avoid late fees. Or you can have alerts sent to you to remind you of an upcoming payment.
More: Hidden junk fees from businesses can drive up costs. Biden, FTC plan would end it.
Even so, a $40 or $41 late fee for a second infraction within six months or so, by anyone's guess, is a great deal of money to most people. That's particularly true when the credit card's interest rate could be 25% or higher today.
The Credit Card Accountability, Responsibility and Disclosure Act of 2009 put a limit on late charges and provided other protections for consumers. Many consumers, as I recall from columns I wrote then, were getting hit left and right by all sorts of troubling practices before this key change in the law.
But everything isn't straightforward.
In 2010, according to the Consumer Financial Protection Bureau, the Federal Reserve Board of Governors voted to issue a regulation implementing the CARD Act that stated that banks could only charge fees that recover the bank’s costs associated with late payment.
But regulators noted Tuesday, the rule included an immunity provision that allowed credit card companies to "sidestep accountability" by agreeing to charge no more than $25 for the first late payment, and then $35 for subsequent late payments.
Another catch: Both of those amounts could be adjusted for inflation.
Right now, the CFPB stated, large card issuers charge consumers $30 for the first late credit card payment and $41 for subsequent late payments, with the average late fee at $32.
In 2022, the agency said, credit card issuers charged consumers $14.5 billion in late fees.
These fees went up, the CFPB noted, even as credit card companies have "moved to cheaper, digital business processes."
Congress transferred authority for administering CARD Act rules from the Fed to the CFPB.
The CFPB stated in its announcement Tuesday that its final rule will save consumers more than $10 billion in late fees annually once the final rule goes into effect by reducing the typical fee from $32 to $8. The average savings, according to the regulator, could be $220 per year for the more than 45 million people who are charged late fees.
The agency said its final rule would end automatic inflation adjustments on late fees for issuers that have 1 million or more open accounts. The CFPB estimates that the new $8 safe harbor amount would apply to the largest 30 to 35 credit card issuers by outstanding balances.
Credit card issuers with 1 million or more open accounts cover more than 95% of the total outstanding balances in the credit card market as of the end of 2022, according to the CFPB.
Would the $8 fee apply to a credit card that you have through a specific retailer? It might. The final rule would cover all private label products, too, according to the CFPB, including retail or store-specific cards that are issued by the largest banks or credit unions with 1 million or more credit card accounts.
“For over a decade, credit card giants have been exploiting a loophole to harvest billions of dollars in junk fees from American consumers,” according to a statement from Rohit Chopra, the director of the CFPB.
“Today's rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines," Chopra said.
Yet, I suspect credit card issuers will put up a big fight here. "This rule should not be allowed to go into effect," ABA's Nichols concluded in his statement.
Ted Rossman, senior industry analyst for CreditCards.com and Bankrate.com, said the final rule would lower a safe harbor to $8 for all late fees. So there would no longer be a first offense fee and then another higher fee for subsequent offenses.
"The agency's perspective seems to be that late fees have become more of a cost center than a true reimbursement," Rossman said.
While the CFPB doesn't seem to think issuers can justify charging more than $8 for late fees, Rossman said, he thinks $8 is too low of a fee to be much of a deterrent. He said lower income households, which are more likely to pay late, could be hit the hardest by higher interest rates, tighter lending standards, and lower credit lines if a lower fee is put in place.
In 2020, the most recent data available, Rossman said, 33% of credit cardholders paid late at some point. The data included 38% of cardholders earning less than $40,000 per year.
The final rule involving the late fee cap would be effective 60 days after publication in the Federal Register. Publication is expected in a few weeks, which could mean the rule would take place in less than three months from now.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.
This article originally appeared on Detroit Free Press: Credit card late fees could drop to $8 from an average $32 by summer
