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The Consumer Financial Protection Bureau (CFPB) has issued a new, controversial proposal that seeks to cap credit card late fees at only $8. Considering that the average late fee is $31, according to the CFPB, this new proposal represents a significant potential reduction in card fees.
The CFPB claims that late fees cost consumers $12 billion each year. It’s also important to note that, according to the CFPB, card fees – including late fees – comprise 15% of the profits generated by card companies.
Given such statistics, it’s hard to argue with the CFPB, particularly since they are a consumer watchdog agency after all. Moreover, no one likes paying late fees, right?
Before you write your write your senator expressing support for this proposal, though, you should consider the potential negative repercussions of this bill. Let’s get into some of the possible negative consequences, so that you can be an informed consumer (and constituent).
What is the cost of a credit card late fee?
Before we discuss the proposal in detail, let’s make sure we understand how late payments work.
Unbeknownst to many consumers, there are already caps in place. Currently, the limit is $30 for your first late payment and $41 for subsequent late payments within the next six billing cycles. This fee cap came shortly after the passage of the Credit Card Accountability Responsibility and Disclosure (CARD) Act in 2009.
For a specific example, here’s what Citibank lists for its late fee policy:
The late fee is $30 and, if you make another late payment within the next 6 Billing Periods, the late fee will be $41.
BONUS TIP!
As already mentioned, the average late fee is $31. However, according to the CFPB, most smaller banks and credit unions charge late fees of $25 or less. Given this, if you’re concerned about high fees, consider comparing the best smaller bank and credit union cards.
When are credit card late fees charged?
Banks charge credit card late fees at different times, so cardholders need to do their homework.
The exact time an issuer considers a payment late varies, but payments are generally due the same day and time every month, usually by the close of business. Specifically, according to the CFPB:
Card companies generally can’t treat a payment as late if it’s received by 5 p.m. on the day it’s due (in the time zone stated on the billing statement), or the next business day if the due date is a Sunday or holiday.
If your payment due date falls on a day the card company doesn’t receive mail – generally weekends or a holiday – you usually have until 5 p.m. on the next business day. Be sure to check the policy of your card, though, by calling your issuer or by referring to your card’s terms and conditions on the CFPB’s website.
Why capping late fees if bad for consumers
As you might expect, large card issuers are pushing back on the bill proposal. Interestingly, credit unions and smaller banks, which have a reputation of being more consumer-friendly, have also aggressively pushed back.
Financial institutions claim, among other things, that the proposal could end up hurting responsible cardholders who pay on time. Considering that I don’t remember the last time I paid my bill late, this particular statement caught my attention.
While I certainly haven’t always agreed with the banking industry during my 25-plus years as a consumer advocate, I do believe card issuers will offset the lost revenue from reduced late fees in other ways (if this proposal succeeds) that could hurt some consumers.
Historically, one way issuers have offset fee caps is by raising other fees, introducing new fees or by raising rates (or a combination thereof).
I vividly remember when First Premier Bank, which focuses on issuing cards to consumers with low credit scores, raised its rates from an attractive 9.9% fixed APR to a shocking 79.99%! This rate hike came soon after the CARD Act put a cap on card fees.
Longtime personal finance journalist Donna Freedman, author of the “Your Playbook for Tough Times” books, points out another related potential negativity.
“Some experts say that if card issuers make less due to the passage of the CFPB policy, they might start tightening their lending requirements and that could mean that some lower-income folks would no longer qualify for credit,” Freedman explains.
If that’s true even some of the time, it’s not a great outcome. The old adage of consumers who can least afford it may pay the highest price is definitely applicable.
Why capping fees is bad for business (and why you should care)
Since I normally write from a consumer viewpoint, I rarely explore how a financial policy might impact a business (in this case the card issuers). However, given the pushback by smaller banks and credit unions on this particular proposal, let’s consider this angle.
Many smaller banks and credit unions claim they could be forced out of the card business since they are so dependent on fee income, especially considering that their interest rates are usually lower than those of big banks.
Even if only a small percentage of credit unions or smaller banks exit the card business, the ripple effect for consumers could be huge.
- Credit unions and smaller banks usually charge lower card fees (as noted above). So, a smaller pool of cards issued by small banks and credit unions will limit the number of lower fee card options available to consumers.
- Competition will decrease. I’ve observed for many years that competition (more so than public policy) is the one thing that truly protects consumers from egregious card practices. A dirty little secret is that the industry is very competitive and this competition naturally drives rates and fees down (i.e. the benefits of a free market).
“When card issuers compete for your business, reward programs are more generous and it tends to keep fees lower,” explains Beverly Harzog, a consumer finance analyst with U.S. News and World Report and author of The Debt Escape Plan: How to Free Yourself from Credit Card Balances, Boost Your Credit Score, and Live Debt-Free. “As competition decreases, though, issuers don’t have to work as hard to get cardholders. There are fewer options for consumers so that incentivizes issuers to possibly rein in rewards programs and raise fees.”
Final thoughts
While I commend the CFPB for fighting hard for consumers for the past several years, I believe this particular fight could have unintended negative consequences. If you share my convictions, I would encourage you to share your opinions with the CFPB directly. If you don’t share my convictions, I would still encourage you to share!
Regardless, I sincerely hope this article has been helpful to you and would love your feedback on anything related to card fees. Who knows, I may include a tip from you in a future article! Best wishes in using these cards to your financial advantage and “Happy Summer!”
