Biden administration slashes credit card late fees to $8 — down from $32 on average
The Biden administration capped credit card late fees at $8 this week in a measure that will save millions of Americans hundreds of dollars a year.
The rule set by the Consumer Financial Protection Bureau (CFPB) was finalized this week, limiting credit card late fees to just $8, down from an average of $32. The government watchdog estimates that under the rule, 45 million people will save an average of $220 per year on late fees.
The announcement comes a year after the CFPB’s initial proposal to reign in credit card late fees was issued for comment as part of President Joe Biden's campaign against excessive junk fees.
It also comes during a time when more and more Americans are drowning in debt. Collectively, US credit card balances hit a record-breaking $1.13 billion at the end of last year — and counting.
“For over a decade, credit card giants have been exploiting a loophole to harvest billions of dollars in junk fees from American consumers,” said CFPB director Rohit Chopra. “Today’s rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines.”
Read more: Credit card fees explained: 8 types you should know
While the measure is a good sign for folks at risk of slipping into delinquency, particularly millennials burdened by student loan debt, it drew criticism from bank lobbyists who argue it will make borrowing tougher on US households in the near future.
Americans could save billions in junk fees
By lowering what’s known as the immunity provision dollar amount — or safe harbor limit — the CFPB is allowing card issuers to charge no more than what it costs them to collect late payments.
The new rule would also eliminate the automatic inflation adjustment on credit card late fees. The adjustment had been added by the Federal Reserve Board but was not required by law, the government watchdog said. Instead, the CFPB will continue monitoring market conditions to determine if the $8 cap should be adjusted moving forward.
Additionally, bigger card issuers that opt to charge above the new limit will have to show proof why the higher fees are necessary to cover collection costs.
Overall, the new rule alone will curb fees that cost American households more than $14 billion a year, the CFPB noted.
Bank lobbyists say cap on credit card late fees will do more harm than good
Trade groups and some industry experts representing credit card companies pushed back, saying the new regulation could make borrowing harder for Americans.
The American Bankers Association (ABA) characterized the new rule as a “misguided decision” that would actually worsen borrowing conditions for American households. By lowering the cap on late fees, bankers would respond by tightening lending standards and raising APRs for all consumers — including those who pay on time.
That could be a problem, given credit card interest rates have nearly doubled in the past 10 years, a separate study by the CFPB found. The average APR grew from 12.9% in late 2013 to 22.8% in 2023 — the highest level on record since the Federal Reserve first began tracking the data in 1994.
Read more: How does the Fed affect your credit card interest rate?
“Today’s flawed final rule will not only reduce competition and increase the cost of credit but will also result in more late payments, higher debt, lower credit scores, and reduced credit access for those who need it most,” Rob Nichols, president and CEO of ABA, said in a statement.
Other industry experts noted that the rule, created with the intention to increase lending transparency and ease affordability, could create other problems.
Before the new rule, the Board of Governors of the Federal Reserve established standards for penalty fees related to credit cards under the CARD Act of 2009. This included setting the safe harbor fee or 'cap amount' for late credit card payments — which the Fed had limited to $30 for an initial late payment and up to $41 for a subsequent late payment.
While credit card issuers didn't surpass the safe harbor limit, the Fed found that as of 2020, eighteen of the top 20 issuers were charging at or near the $40 cap.
Furthermore, the CFPB revealed that since 2010, credit card issuers have been steadily increasing credit card late fees each year within these limits— generating as much as $14 billion in 2022.
Now that the safe harbor limit has been set to a threshold of $8, bankers may look elsewhere to gain back those profits, one expert noted.
“The deep cut in the safe harbor amount may prompt issuers to set their late fees outside the safe harbor,” James Mann, a partner and attorney at Davis Wright Tremaine law firm, said in an emailed statement. “Non-safe harbor late fees may be double the safe harbor amount or more. And they’ll differ from issuer to issuer and over time, complicating consumers’ comparison shopping.”
The rule, which will be effective at the beginning of May, could have the potential of relieving the financial burden of those most vulnerable who live paycheck to paycheck. Still, it won’t be surprising if it receives further pushback from bankers.
“I’ll be shocked if someone does not sue the Bureau over the new rule,” said David Gossett, partner, and co-chair of appellate practice at Davis Wright Tremaine.
Gabriella Cruz-Martinez is a personal finance and housing reporter at Yahoo Finance. Follow her on X @__gabriellacruz.
