A proposed rule from the Consumer Financial Protection Bureau (CFPB) is designed to help ensure that over-the-top late fee amounts are illegal, reducing late fees by as much as $9 billion per year.
Credit card companies, according to CFPB Director Rohit Chopra, “have exploited a regulatory loophole that has allowed them to escape scrutiny for charging an otherwise illegal junk fee.”
The proposal, he said, “seeks to save families billions of dollars and ensure the credit card market is fair and competitive.”
Gouging the consumer
Regulators point out that if you miss a payment due date, you may be hit with a fee that far exceeds the credit card company’s costs to collect late payments -- even if you pay a few hours after the deadline.
The CFPB adds that these late fees also may be on top of other consequences of paying late, such as a lost grace period on paying interest or a lower credit score.
As an example, companies currently charge people as much as $41 for each missed payment, resulting in billions of dollars in annual junk fee revenue for credit card companies.
Financial and emotional damage
These excessive fees can have a number of consequences for consumers who are hit by them.
“Right now, the max late fee is $29 for a first offense and $40 for any others within the next six months,” said LendingTree Chief Credit Analyst Matt Schulz.
Any change would be good news for consumers. Shultz said “even if you can’t pay in full, you have to make sure that you pay at least the minimum required by your issuer each month. Otherwise, it can do real damage to your credit. You can avoid that by using tools like autopay.”
It isn't just the extra out-of-pocket expense that's damaging.
"The financial stress and difficulties associated with late fees and increased debt can put strain on personal relationships," Levon Galstyan, a Certified Public Accountant at Oak View Law Group, told ConsumerAffairs. "This can make it difficult to maintain strong and supportive personal connections."
What the proposed rule would do
The changes proposed by the CFPB would amend regulations implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 and ensure that late fees meet the Act’s requirement to be “reasonable and proportional” to the costs incurred by issuers to handle late payments.
Specifically, the proposed rule would lower the immunity provision for late fees to $8 for a missed payment as well as end the automatic annual inflation adjustment.
It would also ban late fee amounts above 25% of the consumer’s required payment.