Much-talked-about $8 late fee on credit cards hits roadblock: What's ahead

Consumers who fall behind making credit card payments could be shocked if they end up spotting a $30 or $41 late fee, especially if they expected to see the charge knocked down to a flat $8 by now.

We've anticipated an upcoming crackdown on outrageous late fees for credit cards ever since March when the Consumer Financial Protection Bureau issued a final rule. The rule — and a new $8 late fee — was on course to go into effect Tuesday.

President Joe Biden highlighted eliminating or limiting "junk fees," including late fees on credit cards, in his State of the Union Address in 2023, stating: "We’re cutting credit card late fees by 75%."

But the U.S. Chamber of Commerce, the American Bankers Association, the Consumer Bankers Association and others pushed back aggressively, sued in federal court in March and got a big break Friday when a federal judge in Texas issued a preliminary injunction to halt the May 14 kickoff.

The court’s preliminary injunction puts the rule on hold for now. Bankers are viewing this as a preliminary injunction that applies nationwide.

Even so, consumers face much uncertainty ahead as the legal challenges continue.

How your credit card issuer will handle the latest twist in the battle of the late fees might not be clear cut. It's possible that some card issuers already have an $8 late fee written into their terms and conditions, and will continue on that path. Many likely will use the reprieve to keep charging high late fees of up to $38 or even up to $41.

And new or expanded fees could still be popping up at some issuers, such as promotional fees, returned payment fees, and fees for paper statements.

On May 7, PNC Bank launched its first new credit card offering in several years, called the Cash Unlimited Visa Signature Credit Card. The card has a 0% introductory offer on eligible purchases for 12 months after opening the card. It has unlimited 2% cash back on eligible purchases.

Under its terms and conditions, the card lists a late payment fee of up to $8.

The card has a returned payment fee of up to $38. Payments may be returned because the card holder doesn't have enough money in the bank account, or perhaps, has a closed account or frozen account.

While the $8 late fee is attractive, a $38 returned payment fee would be a hit to someone who bounces a check. Those who qualify but have lower credit scores also could face rates in the 30% range.

After the introductory 0% rate ends, the card would have an interest rate that ranges from 19.24% to 30.24% currently, depending on your creditworthiness. The PNC Cash Unlimited Visa has a penalty rate of 34.24% that may be applied to your account if you make a late payment. The penalty rate would apply until you make six consecutive minimum payments on time.

More: Credit card issuers push back on $8 late fee cap with new fees, higher interest rates

More: Regulators want to slash credit card late fees to $8 from $32 average

A nearly 40% penalty rate?

High interest rates — including high penalty rates — can very much be part of the road ahead.

Some credit card issuers already raised their interest rates this spring and slapped on new fees, such as a $1.99 a month fee for paper statements, to make up for expected lost revenue that would hit when they would be required to cut the typical late fee by 75%.

Lowe's customers took to social media this spring to grumble when interest rates on Lowe's credit cards jumped to 31.99% — even when customers had a good payment history and maintained a good credit score. The Synchrony-issued card also added a $1.99 a month fee for those customers who continued to receive paper statements.

A T.J. Maxx shopper was notified that the annual percentage rate on TJX Rewards credit cards would jump to 34.99%, according to an April report in the American Banker. And the penalty rate, which could still be applied when customers are late, would go up to 39.99%. The notice also said Synchrony is adding a $1.99 monthly fee if T.J. Maxx card customers continue to receive paper statements.

The late payment fee was listed as up to $38 early in 2024, according to the terms and conditions for the TJX Rewards credit cards.

Credit card issuer Synchrony Financial — which specializes in store-branded cards — announced in late April that it is hiking interest rates on many cards, along with taking other steps to soften the financial hit of the $8 late fee restriction.

Synchrony offers credit cards in partnership with Sam's Club, Lowe's, QVC, Fanatics, Gardner White, American Eagle, Value City, Ziebart, the JCPenney, Dick's Sporting Goods, Walgreens and others. But you'd need to check your Synchrony card to see what changes, if any, could be ahead for you. Fees and rules could vary by type of card.

Bankers applaud delay in new $8 fee rule

Bankers celebrated Friday's preliminary injunction; consumer advocates criticized it.

Consumer Bankers Association President and CEO Lindsey Johnson released a statement Friday saying that bankers were pleased that the CFPB's rule was stopped from going into effect May 14. "We continue to look forward to making our case in District Court on why this ill-advised rule should be thrown out entirely,” Johnson said in the statement.

American Bankers Association President and CEO Rob Nichols stated that "this injunction will spare banks from having to immediately comply with a rule that clearly exceeds the CFPB’s statutory authority."

Bankers have argued that the industry would be forced to find other ways to hedge the risks associated with unsecured lending, such as raising interest rates and making underwriting more strict. The changes, bankers said, would make it harder and more expensive for new and current cardholders to get credit and manage their debt.

Consumer advocates, though, questioned the basis of U.S. District Judge Mark Pittman's decision, which cited a 2022 ruling by the conservative, New Orleans-based 5th U.S. Circuit Court of Appeals that found the CFPB's funding structure unconstitutional. The 5th Circuit Court sided with arguments being made by trade groups representing payday lenders.

"Using that logic, everything the CFPB has done is unconstitutional," said Chi Chi Wu, a senior attorney at the National Consumer Law Center focusing on consumer credit issues.

The U.S. Supreme Court is expected to rule by the end of June on whether the funding structure for the Consumer Financial Protection Bureau is constitutional, an issue that would have far reaching impact on all sorts of banking and lending practices.

"This is a mess that will be amplified by a thousand-fold if the Supreme Court strikes down the CFPB as unconstitutional," Wu said.

According to a statement from a spokesperson at the Consumer Financial Protection Bureau, "consumers will shoulder $800 million in late fees every month that the rule is delayed — money that pads the profit margins of the largest credit card issuers."

"The credit card lobby’s lawsuit is an attempt to derail a rule that will save families $10 billion each year in order to continue making tens of billions of dollars in profits by charging borrowers late fees that far exceed their actual costs," according to the CFPB statement.

"We will continue to defend this rule so that working families can stop paying excessive late fees that Congress banned more than a decade ago."

The CFPB has argued that credit card issuers have used an inflation-related loophole to drive up fees.

In 2010, the CFPB noted, the Federal Reserve Board of Governors voted to issue a regulation implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009. The rule indicated that banks could only charge fees that recover the bank’s costs associated with late payment.

"However," the CFPB noted, "the rule included an immunity provision that 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, with both amounts to be adjusted for inflation each year. Those amounts have ballooned to $30 and $41, even as credit card companies have moved to cheaper, digital business processes."

More important than ever to pay credit card bills on time

Right now, consumers would be smart to pay attention to any inserts regarding changes in terms and conditions for their credit cards. Issuers could continue raising rates and adding fees. Don't overspend. Keep track of balances by checking them online or by phone. Avoid using store-issued credit cards, which can have extremely high interest rates.

If you fear missing a payment, it's possible to set up an automatic payment for your credit cards through your checking account to cover the minimum payment due on each of your cards. If you do not pay at least the minimum amount due, credit cards will charge a late fee. And paying late could drive your annual percentage rate into a 30% range or higher

Also call up your credit card issuer and see if a fee can be waived, especially if it's a one-time mistake.

As it stands now, the CFPB rule would not change the credit card issuer's ability to raise rates — and Wall Street analysts said issuers were likely to do just that, as well as adding other types of fees.

The $8 limit, according to the CFPB, is based on what it would take to recover the collection costs a credit card issuer incurs as a result of late payments.

Yet it's possible some issuers could charge more. "Larger card issuers will be able to charge fees above the threshold so long as they can prove the higher fee is necessary to cover their actual collection costs," the Consumer Financial Protection Bureau noted in its March announcement.

Late fees contributed 12% to 2023 revenues on average for the five major card issuers tracked by Goldman Sachs. Late fees were estimated to be 25% of revenues at Bread Financial Holdings, and 20% of revenues at Synchrony, according to a Goldman Sachs analyst's report earlier this year.

It's a wait-and-see-what's-next story for now. But consumers cannot afford to ignore how the cost of borrowing on a credit card keeps going up, either. Don't bet on any possible $8 late fee solving all your troubles.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.

This article originally appeared on Detroit Free Press: $8 credit card late fee hits roadblock: What's ahead for consumers