New Credit Card Late Fees Cap: How Will It Impact The Consumer

A tally by the Consumer Financial Protection Bureau (CFPB) found that cardholders in America paid a record $130 billion in interest and fees in 2022. As a result, the Bureau decided to cap the late fees that banks charge customers. As per CFPB, more than 45 million cardholders are charged late fees and said that this move can help these cardholders save $220 a year per household.

Large credit card companies can now either charge a maximum late fee of $8 or justify a higher amount by showing that they need to charge more to cover their actual collection costs. This rule applies to the largest card issuers who have more than 1 million open accounts. The rule is set to bring the excessive credit card late fees down by $10 billion a year.

"Today, the credit card industry hauls in more than $14 billion in late fee revenue each year, which our research shows is more than five times the companies’ associated costs. They charge these fees to consumers even when their payment is only a little bit late or when it’s out of their control. This is on top of extra interest charges, negative credit reporting, and a slew of other consequences," CFPB director Rohit Chopra said in a statement. 

However, the reviews on the $8 cap on credit card late fees are mixed. According to some financial experts, these savings can result in the loss of benefits, for the consumers in the long term. "The reality is that (capping late fees) will also increase the likelihood that banks raise other types of fees to make up for the lost revenue," said Matt Schulz, chief credit analyst at financial products comparison site LendingTree, via USA Today.

How could the cap affect consumers?

According to experts, banks may eventually hike other fees to recover their lost revenue. Balance transfer fees have been rising, "and this could very well accelerate that growth," said Schulz. It was also said that even the non-profit credit unions may suffer because the credit union can fail to afford the risks associated with their credit card programs. This can result in either increasing costs for all cardholders or eliminating credit card programs for those with lower credit scores, as per Jim Nussle, president and chief executive of nonprofit advocate group America’s Credit Union.

While CFPB  says that this rule "closes a longstanding loophole abused by credit card giants" and "is an important step forward," many experts believe that even with lower late fees, consumers will continue to see a rise in late fees if the payments are not made regularly. As per reports, Americans collectively owe $1.13 trillion on just their credit cards and the average balance per borrower is around $6,360 which is a record high, via CNBC. 

"With credit-card debt crossing the trillion dollar mark, we will be working to prevent bait-and-switch tactics when it comes to rewards and to increase refinancing activity so consumers can get lower rates," CFPB Director Rohit Chopra added. 

Other consumer advocates are happy with CFPB's crackdown, which is a part of the larger effort to combat what the Biden administration calls, "junk fees." Back in 2020, late fees ranged from $30 to $41 for each late payment. According to Dennis Kelleher, president of Better Markets, these numbers "represent a real financial hardship." The policy is all set to take effect in Spring 2024 and could save billions of dollars for cardholders each year.