By now, most Americans are feeling the pinch of rising inflation. In June, overall consumer costs were up 9.1% from the same time last year, the sharpest spike since 1981. Inflation seeps into every aspect of our financial lives – from grocery bills, to gasoline, to housing costs.
The good news? Credit card late fees could decrease significantly by 2023.
Last month, the Consumer Financial Protection Bureau (CFPB) released a Notice of Proposed Rulemarking (NPRM) regarding credit card fees. Per the announcement, the CFPB is considering tightening rules governing maximum late payment penalties – and it could save consumers billions of dollars each year.
Under federal law, credit card issuers are prohibited from charging “excessive” penalties for negative account activity. When it comes to credit card late fees, penalties must be “reasonable and proportional” to what it costs the lender to process a late payment.
The CFPB is seeking information regarding an “immunity provision” that enables credit card companies to sidestep late payment penalty regulations. This loophole allows credit card issuers to escape federal scrutiny if they set fees at or below a certain level (currently $30 per late payment.)
The NPRM is the first step in determining if credit card companies are charging late fees that are truly “reasonable and proportional” – and what the CFPB will do about it.
Thanks to consumer protection laws, you’ll never get hit with a $100 penalty for a late credit card payment. But under these same regulations, lenders can charge late fees below a certain level without consequence. This means - while there is an official limit - their penalties may still exceed the cost of processing your late payment.
According to the CFPB, 18 of the top 20 credit card issuers have their current late payment penalties set at or near this maximum level. This upper limit - known as “safe harbor” - is adjusted annually for inflation. With inflation skyrocketing, it’s increasingly urgent for the CFPB to reassess these provisions. Otherwise, late fees will likely jump even higher.
More than 175 million Americans hold at least one credit card. While most folks pay their bill on time each month, financial stressors - or simple forgetfulness - can result in late payments. When this happens, consumers start racking up late fees.
Many credit card issuers have made late fees a central part of their business model. Consumers pay an average of $26 per late payment and $34 for additional late payments made within six billing cycles. According to the CFBP, these small charges added up to $12 billion in credit card late fees last year.
Late payment penalty currently account for around 10% of total credit card costs for consumers. As inflation continues, minimum penalty hikes could stress household budgets even further. In contrast, tightening late fee regulations could save consumers money at a time when it matters most.
Consumer watchdogs argue that rather than incentivizing on-time payments, late fees penalize households struggling to make ends meet. According to the CFPB, credit card late payment penalties disproportionately impact low-income and majority Black neighborhoods.
Marginalized communities are often lower-income as a result of historic housing and employment discrimination. Late fees are just one way our credit system perpetuates systemic inequities that trap families in the cycle of poverty.
Many low-income households lack emergency savings and lean on credit to cover unexpected expenses. As a result, economically-disadvantaged consumers wind up paying more in interest – and even more, if they don’t pay on time.
With their June announcement, the CFPB called for information about late fee processes, including: how lenders determine late fee amounts; costs and losses associated with late payments; efficacy of late fees in deterring subsequent delinquencies; and other methods lenders use to encourage on-time payments.
The window for public comment (in which lenders and consumers can provide the requested information) closes on July 22. From there, the CFPB will assess if and how it will change the rules surrounding late payment penalties. While the timeline is still unclear, officials expect a final decision sometime in 2023.
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The StellarFi blog is intended to serve as an informational resource. While StellarFi can help you build your credit, we do not provide financial, legal, or accounting advice. Please consult a trusted advisor for financial, legal, or accounting guidance as needed.