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A new federal government rule promises to cut the typical credit card late fee from $32 to $8.
On the face of it, that sounds like a good deal for consumers. After all, who doesn’t like lower fees?
However, the reality isn’t as simple as that. This new rule is not likely to benefit most credit card customers. In fact, it may hurt some of them, including those it intends to help.
Whether or not you incur late fees, you should know about how this new rule might affect your credit card accounts.
What is the new rule on credit card late fees?
The Consumer Financial Protection Bureau (CFPB) announced that the following rules would apply to late fees:
- Under most circumstances, late fees would be limited to $8 per occurrence. Until now, they could be up to $25 for the first occurrence, and up to $35 for subsequent late payments. Under the old rules, late fees were averaging $32.
- Credit card issuers would only be allowed to charge more than $8 for late payments if they could demonstrate that their cost of collecting those late payments exceeded $8.
- Credit card issuers can no longer automatically adjust late fees for inflation. They would have to demonstrate that their actual cost of collecting those fees had risen.
The CFPB explained its new rule by pointing out that the average late fee charged by major credit card issuers has risen from $23 at the end of 2010 to $32 currently. These fees now total $14 billion a year, which is over 10% of the revenue credit card companies get from their customers.
The CFPB’s argument is that late fees have become a major revenue source for credit card issuers, rather than a way of recouping the expense of late payments.
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How will this affect credit card customers?
In announcing the new rule, the CFPB highlighted that fact that the reduction in late fees would represent an average annual savings of $220 to credit card customers who are charged late fees.
However, that’s a very different thing from meaning that the typical credit card customer would save $220 per year. That’s because most credit card customers don’t have any late payments.
Even the minority of customers that would benefit directly from lower late fees might not be happy with the new rule for long. Credit card issuers would be less likely to tolerate people who are frequently late with their payments once they can no longer charge higher fees. Many customers who are in the habit of paying late could find their credit card issuers would simply terminate their accounts.
In short, it’s possible that the new rule could ultimately hurt those customers it’s intended to help.
As for customers who are rarely or never late with a payment, they might be impacted by the new rule as well. As the CFPB has pointed out, late fees are a significant revenue source for credit card companies. With late fees being severely restricted, they will look for other ways to make up for the lost revenue.
A CardRatings.com survey found that over 40% of 60 popular credit cards studied do not charge an annual fee. Once revenue from late fees is restricted, more credit cards may start charging annual fees. Those that already charge annual fees may react by raising those fees.
When will the cap on late fees go into effect?
The rule will go into effect 60 days after the details have been published in the Federal Register. That publication date has not yet been announced.
The lawsuit claims the CFPB has exceeded its authority by imposing the fee cap. It also says the new rule would violate the intent of Congress in outlining the rules governing late fees in the 2009 CARD Act.
It remains to be seen whether this lawsuit will succeed. At the very least, it seems likely to delay implementation of the cap on credit card late fees.
Why credit card customers should still avoid late payments
Even if the fee cap survives the legal challenge, credit card customers should keep in mind that high late fees aren’t the only reason why they should make every effort to pay their credit card bills on time.
For people who are habitually late paying their credit card bills, even an $8 late fee could substantially add to the cost of using credit. In addition, they could suffer the following consequences:
- Damage to credit score. Payment history is the biggest single factor in determining your credit score, so late payments can really hurt.
- Penalty interest rates. These are higher interest charges on overdue balances.
- Higher interest rates on future purchases. A poor credit score and/or a bad payment history with a particular card could result in you having to pay more interest when you use a card in the future.
- Reduced credit limits. If you can’t be relied on to pay your bills on time, you represent a bigger risk to the credit card issuer. One way they might manage that risk is by lowering the amount you’re allowed to borrow.
- Account cancellation. Ultimately, credit card issuers may decide customers whose payments are regularly overdue just aren’t worth it at the lower fee. If so, they may respond by cancelling your account.
- Difficulty getting credit in the future. If you have a poor payment history with your current credit accounts, expect getting new ones to be much harder.
People who often pay their credit card bills late might save some money if the fee cap goes into effect. However, they might ultimately find that late payments threaten their access to credit.
