New Rule to Cap Most Credit Card Late Fees at $8

Typical charge by banks for tardy payments is $32, CFPB finds

John Waggoner,

AARP

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Published March 05, 2024

AARP (source: Alamy Stock Photo(2))

The Consumer Financial Protection Bureau (CFPB) has finalized a rule that would cap late fees on credit cards, lowering the typical charge to $8 from $32. The agency says that the new rule would save cardholders more than $10 billion in late fees, or $220 a year on average, for each of the more than 45 million people hit yearly by late fees.

“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 in a March 5 statement. “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.”

The rule could take effect as early as May and would apply only to major card issuers – those with at least 1 million open accounts. Even so, the rule would cover 95 percent of total outstanding credit card balances, the CFPB says.

Credit card companies charged about $14 billion in late fees in 2022, the CFPB says. Under the new rule, the companies will be able to raise their late fees above $8 only if they can prove that they need more to cover collection costs.

The CFPB’s rule also bans companies from increasing fees by the rate of inflation, the current practice for many institutions. With inflation adjustments, the $25 cap (first late fee) and $35 cap (subsequent late fees) set in 2010 have risen to $30 and $41, respectively.

Banks oppose rule change on fees

Banks were not happy with the new CFPB rule.

“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,” said Rob Nichols, president of the American Bankers Association.

The Independent Community Bankers of America said that the new rule would send the message to consumers that late payments aren’t a big deal – and therefore lead to more late payments.

“Credit card late fees — which are clearly disclosed — deter late payments and help offset the significant costs of collection for issuers,” said CEO Rebeca Romero Rainey. The CFPB points out that there are plenty of other penalties for consumers who pay late, including a lowered credit rating and higher interest rates.

Other consumer groups applauded the move.

“The CFPB’s new rule prioritizes the needs of cash-strapped households ahead of big bank profiteering,” said Adam Rust, director of financial services for the Consumer Federation of America. By prohibiting issuers from charging $30 or more for a missed payment when the true cost to credit card companies is less than eight dollars, “the rule closes the loophole that permitted this form of price gouging and injects fairness where it has been sorely needed,” Rust says.

AARP supports the new rule. "Data shows credit card late fees disproportionately burden consumers in low-income and majority African American neighborhoods," AARP said in an April comment letter to the CFPB. "AARP encourages the CFPB to act to reduce credit card late fees and protect card customers from abusive pricing.”

The new rule will go into effect 60 days after publication of the rule in the Federal Register, provided it’s not held up in court – which it likely will be. The CFPB is also the subject of a Supreme Court suit that questions whether the agency’s funding and regulatory powers are constitutional.

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John Waggoner is a contributing writer of all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously, he was a reporter for Kiplinger’s Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner’s USA Today investing column ran in dozens of newspapers for 25 years.