The Biden administration this week set a cap on credit card late fees at $8, a move that could save millions of Americans hundreds of dollars a year.
Rules set by the Consumer Financial Protection Bureau (CFPB) were finalized this week, capping credit card late fees from an average of $32 to just $8. Government watchdogs estimate the rule would save 45 million people an average of $220 a year in late fees.
The announcement comes a year after the CFPB's initial proposal to regulate credit card late fees was solicited for comment as part of President Joe Biden's campaign against excessive junk fees.
It also came at a time when more and more Americans were drowning in debt. At the end of last year, US credit card balances totaled $1.13 billion and continue to grow.
“For more than a decade, the credit card giants have exploited loopholes to collect billions of dollars in junk fees from American consumers,” said CFPB Director Rohit Chopra. “Today's rules will end the days when major credit card companies used hidden inflationary excuses to increase their own profits by raising fees for borrowers.”
read more: Credit card fees explained: 8 types you should know
While the measure bodes well for those at risk of falling into delinquency, especially millennials with student loan debt, bank lobbyists say it will make it even harder for American households to borrow in the near future. invited criticism.
Americans could save billions in junk fees
By lowering so-called deductibles (or safe harbor limits), the CFPB allows card issuers to avoid charging more than it costs to collect late payments.
The new rules also eliminate automatic inflation adjustments for credit card late fees. The adjustment was added by the Federal Reserve but is not required by law, the government watchdog said. Instead, the CFPB will continue to monitor market conditions to determine whether the $8 cap should be adjusted.
In addition, major card issuers that charge above the new limits will need to prove why they need higher fees to cover collection costs.
Overall, the CFPB noted, the new rules alone will curb fees that cost American households more than $14 billion annually.
Bank lobbyists say caps on credit card late fees will do more harm than good.
Some industry experts representing industry groups and credit card companies pushed back, saying the new regulations could make it harder for Americans to borrow.
The American Bankers Association (ABA) characterized the new rule as a “wrong decision” that will actually worsen the borrowing situation for American households. By lowering the cap on late fees, bankers will respond by tightening lending standards and raising annual interest rates for all consumers, including those who pay on time.
This could be a problem considering that credit card interest rates have nearly doubled in the past decade, according to a separate study by the CFPB. The average annual interest rate rose from 12.9% at the end of 2013 to 22.8% in 2023, the highest level ever since the Federal Reserve first started tracking the data in 1994.
read more: How does the Fed affect credit card interest rates?
“Today's incomplete final rule not only reduces competition and increases the cost of credit, it also results in increased late payments, increased debt, lower credit scores, and reduced credit access for those who need it most. ” said Rob Nichols, President and CEO. said the ABA in a statement.
Other industry experts said the rules were designed to make lending more transparent and more affordable, but they could create other problems.
Prior to the new rules, the safe harbor fee amount for late credit card payments was set at $30 for the first late payment and up to $41 for subsequent late payments. Credit card issuers were also allowed to increase these fees at their discretion.
The CFPB found that since 2010, credit card issuers have steadily increased credit card late fees each year, generating up to $14 billion in fees by 2022.
With the regulatory threshold set at $8, bankers may look elsewhere to recoup their profits, one expert said.
“The significant reduction in the safe harbor amount will encourage issuers to set late fees outside of the safe harbor,” James Mann, partner and attorney at Davis Wright Tremaine LLP, said in an emailed statement. There is a possibility that it will happen.” “Non-safe harbor late fees can be more than double the safe harbor amount. And they vary from issuer to issuer and over time, complicating comparison shopping for consumers. Masu.”
The rules, which go into effect in early May, could ease the financial burden on the most vulnerable people living paycheck to paycheck. Still, it wouldn't be surprising to see further pushback from bankers.
“I would be shocked if someone didn't sue the office over the new rules,” said David Gossett, partner and co-chair of the appellate practice at Davis Wright Tremaine.
Gabriela Cruz Martinez I'm a personal finance and housing reporter for Yahoo Finance. Follow her on X @__Gabriela Cruz.
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