This New Rule Will Cap Credit Card Late Fees at $8.
The Consumer Financial Protection Bureau (CFPB) on Tuesday published a new rule limiting late fees on credit cards. The move reduces typical late fees from an average of about $32 to just $8, saving affected consumers an average of about $220 per year.
How New Rule Limits Late Payment Fees on Credit Cards
The new ruling comes after the CFPB reviewed data showing credit card companies have been steadily increasing late fees over the past decade by exploiting a loophole in the 2009 CARD Act. This law allowed issuers to raise fees to adjust for inflation, which they took full advantage of.
“For more than a decade, credit card giants have exploited loopholes to collect billions of dollars in unwanted fees from American consumers,” CFPB Director Rohit Chopra said in a press release . “Today’s rule ends an era in which major credit card companies hid behind the excuse of inflation as they raised fees for borrowers and increased their own profits.” Here’s how the release outlines the main findings of the new rule:
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Reduces the dollar amount provided for immunity from late fees to $8.00 . According to data analyzed by the CFPB, a late payment fee of $8 would, on average, be enough for large card issuers to cover collection costs incurred as a result of late payments.
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Ends abuse of automatic annual inflation adjustment: The CFPB found that many issuers increased their late fees every year at the same time without any evidence of increased costs. The CFPB’s final rule eliminates the automatic annual inflation adjustment for the $8 late fee threshold. This adjustment was added by the Federal Reserve Board and is not required by law. Instead, the CFPB will monitor market conditions and adjust the $8 penalty immunity threshold as necessary.
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Requires credit card issuers to show their math: Larger card issuers will be able to charge fees above the threshold provided they can prove that the higher fee is necessary to cover their actual collection costs.
By capping late fees at a reasonable $8, the CFPB estimates the new policy will save consumers billions of dollars annually in excessive fines. The rule will go into effect later this spring.
However, while lowering late fees provides some relief, remember that it is just a solution to the larger problem of credit card debt . With interest rates on unpaid balances still averaging around 20% or higher, the underlying problem of making it harder for Americans to get out of credit card debt remains. As always, you should try to pay your credit card bills on time and always pay enough to avoid a balance. What’s more, now is a great time to pay off your credit card balance.