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How the White House aims to slash credit card late fees

The Biden administration is seeking to curb late fees charged by credit card companies to just $8, which if enacted, could help Americans save billions of dollars each year.

The announcement made on Wednesday by the White House is part of its ongoing crackdown on reducing excessive junk fees imposed to consumers when they, among other things, buy tickets at check-out for sporting events, airlines, and concerts.

The Consumer Financial Protection Bureau plans to submit the proposal to limit credit card late fees at $8 for review following the announcement. Currently, credit card issuers charge an average of $41 on top of interest payments. If passed, consumers may see a difference as soon as 2024.

“Over a decade ago, Congress banned excessive credit card late fees, but companies have exploited a regulatory loophole that has allowed them to escape scrutiny for charging an otherwise illegal junk fee,” Rohit Chopra, CFPB Director, said in a statement. “Today’s proposed rule seeks to save families billions of dollars and ensure the credit card market is fair and competitive.”

Customers line up at the cashier area at a Macy's store in Jersey City, New Jersey. (Credit: Kena Betancur/Getty Images)
Customers line up at the cashier area at a Macy's store in Jersey City, New Jersey. (Credit: Kena Betancur/Getty Images)

According to the government watchdog, credit card companies continue to profit off of late fees protected by an expansive immunity provision implemented in 2010.

The Federal Reserve Board, by regulation, created immunity provisions under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) to allow credit card companies to “avoid scrutiny of whether their late fees were reasonable and proportionally standard.”

Additionally, the rule allowed credit card companies to hike fees with inflation. According to the CFPB, the average late fee charged has risen since 2010, most recently up from $30 for an initial late payment to $41 for subsequent late payments.

According to the latest figures, in 2020, American families were charged up to $12 billion in late fees, that’s more than 10% of all credit card interest and other fees charged to consumers. Under the proposed rule to lower the immunity provision for late fees to $8, that amount would be reduced by $9 billion per year, the CFPB estimated.

Chopra said these late fees and other junk fees reflect an “asymmetry of power” that unfairly penalizes consumers when they make mistakes.

“In markets across the economy, junk fees have unfortunately become the norm.” Chopra said. “They’re often charged for so-called services that a consumer never wanted and are set far beyond the true cost. Junk fees inflate prices and chip away at monthly budgets by obscuring part of the price from comparison shopping.”

An air traveler uses a credit card to pay for items at a retail shop in John F. Kennedy International Airport in New York City. (Credit: Robert Nickelsberg/Getty Images)
An air traveler uses a credit card to pay for items at a retail shop in John F. Kennedy International Airport in New York City. (Credit: Robert Nickelsberg/Getty Images)

Additional measures

According to the CFPB, the proposed rule will still allow credit card companies to charge late fees. However, they will have to prove that fees are reasonable if they are above the proposed immunity provision of $8. For example, charging more for people who have chronically missed payments so long as they can prove the higher fee is required to cover additional collection costs.

The government watchdog is also proposing that late fees would not be able to exceed 25% of the required payment and an end to automatic inflation hikes. Under the current rule, credit card companies are allowed to charge a late fee that is up to 100% of the minimum payment owed, the CFPB said.

Chopra added, “At the end of the day, we want to see a marketplace where Americans are treated fairly, where it's easier to switch, where prices and risks are clear upfront, and where companies compete hard to win their customer’s business.”

Next steps

What's next? The CFPB is requesting public comment on changes within 30 days after the publication of the proposed rule in the Federal Register. The federal agency does not need congressional support to enact this rule, as designated by the Dodd-Frank Act.

Already, the proposal to reduce credit card late fees to a cap of $8 has received some backlash.

According to the American Bankers Association, the "extreme late fee proposal" is likely to harm consumers and reduce their access to credit. Should the proposal be enacted, the ABA claims credit card issuers may be forced to adjust to new risks by tightening credit lending standards and hiking the APRs for all consumers — including those that pay on-time.

That may be a problem considering how quickly credit card interest rates increased last year due to inflation.

The average APR rate on a new credit card was 23.39% in January 2023, according to LendingTree, up from 22.91% the previous month. This month's uptick in rates came soon after the Federal Reserve's seventh and final interest rate hike of 2022, a jump of 0.50 percentage points in December. Although rate hikes to tame inflation are expected to slow in 2023, credit card interest rates will likely continue to increase — adding to pressure on consumers.

"Today's extreme CFPB proposal will harm consumers by reducing competition and increasing the cost of credit," the ABA said in a statement. "It will result in more late payments, higher debt and lower credit scores, and is inconsistent with the CARD Act's encouragement of responsible credit management."

Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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