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When you don’t pay your credit card bill on time, you could be hit with a late fee. How much that late fee costs depends on your specific credit card agreement. But now the government is looking at implementing new rules that’ll reduce and limit the amount you pay in late fees.
The Consumer Financial Protection Bureau (CFPB) is trying to put a stop to those huge credit card late fees that end up costing American families around $12 billion a year. Right now, big credit card companies are still making a profit from late fees that are protected by some fancy legal wording that has let them increase the fees even when it doesn’t cost them any more to collect.
But the new rule the CFPB is proposing could cut these late fees by as much as $9 billion each year and make sure the really crazy late fee amounts are against the law. But not everyone is on board with this plan.
Let’s take a closer look at what’s happening:
The government wants to limit credit card late fees to just $8 — which is much lower than it is now.
When someone misses a payment deadline — even if it’s just a few hours late —they may be hit with late fees and possibly other consequences — like losing a 0% APR grace period or even a lower credit score.
As it stands, credit card companies can charge $30 for a first late payment and $41 for any additional late payment within six billing cycles. The CFPB’s proposal would cap the vast majority of late fees at $8.
Now the credit card companies could charge more than $8 if they could prove that it was necessary to cover the costs of collecting the late payment but couldn’t exceed 25% of the required minimum payment (rather than the 100% that’s allowed now). The CFPB has said the credit card companies are charging five times the amount they are spending in collection costs; it’s actually earning them revenue.
Related: The CFPB has recently been busy suing Regions Bank for charging illegal overdraft fees.
Credit card companies would no longer increase late fees at the rate of inflation.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) is a law that requires late fees be “reasonable and proportional” to the costs incurred by issuers to handle late payments.
Credit card companies have had immunity to that rule, and over time, it’s allowed fees to increase with inflation, reaching $30 for an initial late payment and $41 for subsequent late payments. The new regulations would roll back the cost and would also end the automatic annual inflation adjustment for late fees.
Bankers say consumers may end up paying for the reduced fees in other ways.
According to banking groups, the downside to consumers from the CFPB’s proposed rule capping credit card late fees is that it would result in higher costs for these institutions — and they’d pass those costs on to the customer.
The banking industry says credit card companies would be forced to adjust to the new risks by reducing credit lines, tightening standards for new accounts, and raising annual percentage rates (APRs) for all consumers, including those who pay on time. The president and CEO of the American Bankers Association has said that the proposal would result in customers having less access to credit.