How the CFPB's plan to slash credit card late fees could affect you

It is aggravating to discover that you owe an additional fee in a world where everything seems more expensive.

Even the federal government is getting annoyed. Fees got a mention in the 2023 State of the Union address, on account of the Biden administration's recent plan to eliminate 'junk fees,' such as hotel resort fees and service charges for concert tickets.

The Consumer Financial Protection Bureau is joining the moment with a proposal of its own: a cap on credit card late fees that would drop them down to $8, from the current level of up to $41. The rule would also limit how often the fee cap increases due to inflation. Instead of an automatic annual increase, the fee would only be adjusted on an as-needed basis due to market conditions.

Opponents of the proposed ruling — including the American Bankers Association and the Consumer Bankers Association — have issued statements saying it will limit consumer access to credit, reduce the incentive for cardholders to avoid paying late and increase credit card-related costs for cardholders.

The origins and effects of today's credit card late fees

The current cap on credit card late fees dates back to the Credit Card Act of 2009, which stated that credit card penalty fees, including late fees, should be 'reasonable and proportional.' The Federal Reserve, which had authority over these matters at the time, placed a $25 limit on late fees, which would be adjusted annually for inflation. (In 2008, prior to the Card Act, late fees had reached $33.)

Fast forward several years, and the average disclosed maximum fee for late fees reached $39.73 by the fourth quarter 2022 according to data provided by Competiscan, which tracks and analyzes direct market activity.

Much of the burden of late fees falls on consumers with 'deep subprime' credit scores of 579 or lower. The CFPB's 2021 Consumer Credit Card Market Report states that these consumers hold roughly 6% of card accounts, but they generate 24% of late fee volumes. And a CFPB report on credit card late fees from March 2022 found that the average deep subprime account was charged $138 in late fees in 2019, while the average 'superprime' account (credit scores of 720 or higher) was charged $11.

Why the CFPB wants to make changes now

Concern about "junk fees"

Since Rohit Chopra assumed the role of director in 2021, junk fees, which are fees that increase the cost of a service or purchase but provide little value to consumers, have been a major focus of the bureau. The CFPB considers credit-card late fees junk fees. They are fees consumers cannot avoid by shopping around for a better product.

However, the Consumer Bankers Association disagrees with the classification of credit card late fees as junk fees. The CBA cites a 2018 report from the CFPB's Office of Research that says credit card users factor in the costs of late payments when making payment decisions — and thus it's not an unknown consequence that takes consumers by surprise in the way a previously unmentioned fee tacked onto the end of a purchase would.

Questioning the purpose of late fees

According to a CFPB official, late fees were meant to pay the collection costs cardholders incur for late payments. However, they were not intended to generate any profit. The bureau claims that late fees generate five times more revenue than collection costs. The Fed's September 2022 economic research found that credit card fees, including late fees, account for 15% of credit card profitability.

The CBA counters by stating that late fees should be set at around $38 to cover late payments. They cite inflation-adjusted data from Argus Advisory's 2010 study. This study included data from 10 major credit card issuers.

How might a late-fee limit affect consumers?

Opponents to the CFPB's plan for reducing credit card late fees argue that it could limit consumers' credit access. This would be due to more stringent credit criteria for new applicants as well as lower credit limits, higher interest rates, and tighter credit standards. They argue that cardholders would be more likely to pay late fees if they were lower.

Officials at the CFPB claim that critics had expressed similar concerns before Card Act was passed. The years following were used as a test case to see how a late fee cap would work out. According to the bureau's 2013 Card Act Report (PDF), overall credit card fees fell and late fees decreased.

The report does mention the possibility of an improving economy. During this period, late fees declined but annual fees increased.

According to the CFPB, credit card approval rates fell in 2009 due to the Great Recession. They had increased by 2012, but they weren't at their pre-recession levels. According to CFPB research, total credit lines rose 10% between 2012-2015.

However, the years that followed and before the COVID-19 pandemic were more uneven. A 2019 report by the CFPB states that there are signs that issuers are taking more control over credit tiers' risk.

All told, it seems that the economy, not fee limits, may have had a bigger impact on consumer access to credit. We saw this happen again in 2020 at the height of the pandemic when issuers cut credit limits and increased credit score requirements to qualify for some cards.

What's next for the proposed ruling

The late-fee limit hasn't gone into effect yet. The CFPB is accepting public comment, which it may use to make changes to its proposal or decide whether to finalize it at all. If the bureau decides to make a fee limit official, it'll happen later in 2023.

Here are some things you can do to avoid late charges on your credit card

Late fees on credit cards are one consequence for missing a payment. You could also experience a dramatic drop in credit scores, which can take many months to repair. There are steps you can take that will prevent this from happening.

Set up alerts so you know your payment due date is approaching. You can do this by logging into your account and adjusting your preferences so you'll get an email or text notification.
Use autopay so your bill is paid on time, every time. If paying in full isn't always possible, you can use autopay to cover the minimum amount due and pay the rest separately.
Change your payment due date if your card offers that option. This way, payments line up more closely to times when you have more money in the bank, like shortly after you get a paycheck.
Ask for a fee waiver if you do miss a deadline. Many card issuers will give you a break from the fee if you ask, especially if it's the first time you've paid late.