Can Credit Card Companies be Stopped from Charging Astronomical Late Fees?

By Yehudit Garmaise

Missing payments can result in credit card users paying $35 for what were originally $3 cups of coffee, pointed out the Consumer Financial Protection Bureau (CFPB), which on Monday, proposed a new rule that would dramatically reduce the late fees banks can charge consumers.

As President Joe Biden aims to crack down on “junk fees,” which are those charges that are mysteriously folded into phone bills, ticket prices, and resort fees, the CFPB seeks to regulate the skyrocketing income that banks make from collecting late payments.

Credit card users’ late fees in 2020 sent $12 billion into banks’ coffers, the CFPB reports.

Although banks claim they must charge late fees to cover their collection costs, the CFPB estimates that the incomes that banks make from their extra charges are approximately five times greater than their collection costs. 

Under current regulations, credit card issuers, primarily banks, can charge cardholders up to $30 for an initial late payment and $41 for subsequent missed payments. 

The CFPB wants to reduce late payments down to a flat $8: unless a bank can show that its collection cost exceeds $8, per payment. 

In addition, while some banks charge up to 100% of the minimum payments due as late fees, the CFPB wants to limit late fees to 25% of minimum payments. 

“Many credit card issuers have made late fee penalties a core part of their profit models,” CFPB Director Rohit Chopra said. “Given their current practices, we expect that credit card issuers will hike fees, based on inflation, as limits continue to rise.

The banks, which greatly profit from late fees, were surprised the CFPB’s proposal, and they are already gearing up for a fight, Bloomberg reported.

“The [banking] industry is livid over this,” said Alan Kaplinsky, the senior counsel of Ballard Spahr’s Consumer Financial Services Group.

While some banks argue that they clearly disclose late fees and should not be thrown in the same bucket as often-hidden fees from less-regulated industries like entertainment, most credit card users are not buying it.

“The exaggerated late fees disproportionately punish people who might be just disorganized or late with their bills,” said Shmuley W., a credit card user. “I think the late fees should be reduced to allow for human error.”

photo credit: Flickr