What to Know About the CFPB’s Plan to Slash Credit Card Late Fees

At a time when everything seems to cost more, finding out you owe a fee on top of a base purchase price is rage-inducing.

Even the federal government is getting annoyed. Fees got a mention in the 2023 State of the Union address, on account of the Biden administration’s recent plan to eliminate “junk fees,” such as hotel resort fees and service charges for concert tickets.

The Consumer Financial Protection Bureau is joining the moment with a proposal of its own: a cap on credit card late fees that would drop them down to $8, from the current level of up to $41. The rule would also limit how often the fee cap increases due to inflation. Instead of an automatic annual increase, the fee would only be adjusted on an as-needed basis due to market conditions.

Opponents of the proposed ruling — including the American Bankers Association and the Consumer Bankers Association — have issued statements saying it will limit consumer access to credit, reduce the incentive for cardholders to avoid paying late and increase credit card-related costs for cardholders. 

The origins and effects of today’s credit card late fees

The current cap on credit card late fees dates back to the Credit Card Act of 2009, which stated that credit card penalty fees, including late fees, should be “reasonable and proportional.” The Federal Reserve, which had authority over these matters at the time, placed a $25 limit on late fees, which would be adjusted annually for inflation. (In 2008, prior to the Card Act, late fees had reached $33.)

Flash forward several years and by the fourth quarter of 2022, the average disclosed maximum late fee reached $39.73, according to data from Competiscan, a company that tracks and analyzes direct marketing activity.

Much of the burden of late fees falls on consumers with "deep subprime" credit scores of 579 or lower. The CFPB’s 2021 Consumer Credit Card Market Report states that these consumers hold roughly 6% of card accounts, but they generate 24% of late fee volumes. And a CFPB report on credit card late fees from March 2022 found that the average deep subprime account was charged $138 in late fees in 2019, while the average "superprime" account (credit scores of 720 or higher) was charged $11.

Why the CFPB wants to make changes now

A concern about 'junk fees'

Junk fees — which the CFPB defines as fees that inflate the cost of a purchase or service while providing little value to the consumer — have been a focus of the bureau since its current director, Rohit Chopra, assumed the role in 2021. And the CFPB considers credit card late fees to be junk fees because, although they’re disclosed in card terms and conditions, they’re fees that consumers can’t avoid by shopping around for a different product.

However, the Consumer Bankers Association disagrees with the classification of credit card late fees as junk fees. The CBA cites a 2018 report from the CFPB’s Office of Research that says credit card users factor in the costs of late payments when making payment decisions — and thus it’s not an unknown consequence that takes consumers by surprise in the way a previously unmentioned fee tacked onto the end of a purchase would.

Questioning the purpose of late fees

Late fees were intended to cover the collection costs issuers incur when cardholders make late payments, but they weren’t meant to be a source of profit, according to a CFPB official. However, the bureau says that revenues from late fees are five times higher than collection costs. And September 2022 economic research from the Fed found that credit card fees — late fees in particular — make up 15% of credit card profitability.

But the CBA counters that late fees would need to be set at about $38 to cover the cost of late payments, citing inflation-adjusted results from a 2010 study by Argus Advisory, a financial data company. The study featured data from 10 large credit card issuers.

How might a late-fee limit affect consumers?

Opponents of the CFPB's plan to slash credit card late fees say it could affect consumers' access to credit, in the form of more stringent credit standards for new applicants, as well as lower credit limits and higher interest rates. They also argue that lower late fees would be less of a deterrent to paying late (and potentially do long-term damage to cardholders' credit scores).

A CFPB official says critics expressed similar concerns before the Card Act was passed, and the years following served as a test case for how a late-fee cap would play out. The bureau's 2013 Card Act Report, for instance, found that overall credit card fees declined, and the incidence of late fees went down as well.

But the report mentions the improving economy as a possible contributing factor. And while late fees went down during this time, annual fees went up.

In terms of access to credit, the CFPB's report notes that credit card approval rates did dip in 2009 thanks to the Great Recession. But by 2012, they had increased, although at the time, they hadn’t reached pre-recession levels. Total credit lines increased 10% between 2012 and 2015, according to CFPB research.

But the years following that period and preceding the COVID-19 pandemic were a little more uneven. According to a 2019 report from the CFPB, "there are indications that issuers are becoming more active in altering line allocations to control risk in lower credit tiers."

All told, it seems that the economy, not fee limits, may have had a bigger impact on consumer access to credit. We saw this happen again in 2020 at the height of the pandemic when issuers cut credit limits and increased credit score requirements to qualify for some cards.

What’s next for the proposed ruling

The late-fee limit hasn’t gone into effect yet. The CFPB is accepting public comment, which it may use to make changes to its proposal or decide whether to finalize it at all. If the bureau decides to make a fee limit official, it’ll happen later in 2023.

What you can do to avoid credit card late fees

Credit card late fees are one consequence of missing a payment. The other can be a steep drop in your credit scores that can take months to recover from. But there are steps you can take to prevent this from happening: