In a groundbreaking move, the US’s Consumer Financial Protection Bureau (CFPB) has finalised a rule that significantly reduces credit card late fees. This regulation is aimed at alleviating the financial burden on American consumers, who have been paying a staggering $14 billion annually in late fees.
The Rule Change
The new rule will lower the typical late fee charged by large card issuers from $32 to just $8. This change is expected to save each of the 45 million Americans who pay these fines an estimated $220 every year. The CFPB estimates that American families will save more than $10 billion in late fees annually once the final rule goes into effect.
Closing the Loophole
For over a decade, credit card giants have been exploiting a loophole to harvest billions of dollars in junk fees from American consumers. The loophole allowed credit card companies to sidestep accountability if they charged no more than $25 for the first late payment, and $35 for subsequent late payments. These amounts have ballooned to $30 and $41, even as credit card companies have moved to cheaper, digital business processes.
The CFPB’s final rule adopts a lower threshold of $8 and ends automatic inflation adjustments for that amount for issuers that have 1 million or more open accounts.
Industry Backlash
However, this move has not been without controversy. The American Bankers Association, along with the U.S. Chamber of Commerce and other business groups, have filed a lawsuit challenging the CFPB’s new rule. They argue that the rule exceeds the CFPB’s statutory authority and will ultimately harm the consumers it is charged with protecting. They also contend that the rule will result in more late payments, increased debt, reduced credit access, and higher interest rates for all consumers.
Pros and Cons
While the reduction in late fees is a clear win for consumers who have traditionally been charged these fees, there are potential downsides to consider. If credit card companies see a significant reduction in their revenue due to these changes, they may look to recoup these losses by increasing fees across their entire portfolio. This could impact a larger number of consumers, including those who have traditionally been good payers.
Moreover, the reduction in late fee penalties could potentially encourage more consumers to miss payments. While this might seem beneficial in the short term, it could lead to worse outcomes in the long term, such as higher interest rates and negative impacts on credit scores.
The Impact
Late fees are layered on top of many other punitive measures credit card companies impose on consumers who miss payments, including extra interest charges, loss of their grace period, negative credit reporting, reductions in their credit limit, and a higher interest rate on future purchases. This rule change is a significant step towards promoting fair and competitive markets.
The CFPB’s action builds off of steps it has already taken to crack down on junk fees in the banking sector, including fees for basic customer services and moving to curb overdraft fees and bounced check fees.
A Global Perspective
At present, no other major jurisdiction regulates bank fees in the same way that the U.S. does, even though many central banks monitor the total fees paid and their change over time. For instance, in Australia, the Reserve Bank of Australia (RBA) reported that total fees charged to households for credit cards in 2022 were around $1.1 billion, which was an increase of 6% on the previous year’s amount. These fees include all credit card fees, not just late payment fees. The return of international travel in 2022 helped to drive these fees higher. The average servicing fee paid by households was around $83 per credit account.
This highlights the complexity and diversity of banking fee structures around the world. While the CFPB’s move to cap late fees is a significant step towards consumer protection in the U.S., it also underscores the need for ongoing dialogue and action to ensure fair and transparent banking practices globally.
As consumers, it’s crucial to stay informed about these changes and understand how they impact our financial health. As we move forward, it will be interesting to see if other countries follow suit in implementing similar regulations.
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