The U.S. government, under the Biden administration, has introduced new regulations to significantly reduce credit card late fees, capping them at $8. This initiative is part of a broader crackdown on what are termed “junk fees” and is expected to save American consumers billions of dollars annually. The Consumer Financial Protection Bureau (CFPB) is spearheading the effort, which targets large credit card issuers and aims to enhance competition and lower costs for consumers. The financial industry has expressed strong opposition to the new rule, suggesting it could have negative consequences for consumers.
New Regulations on Credit Card Late Fees
The CFPB has finalized a rule that sets a maximum late fee of $8 for credit card payments, a substantial decrease from the previous average fee of $32. This rule applies to large credit card issuers, defined as those with more than 1 million accounts, which represent over 95% of the total outstanding credit card debt. The CFPB’s action is intended to address the significant revenue that credit card companies have been generating from late fees, which amounted to more than $14 billion in 2022.
Impact on Consumers and the Credit Card Industry
The new regulation is projected to save American families more than $10 billion in late fees annually, averaging a savings of $220 per year for the more than 45 million people who are charged late fees. The CFPB’s decision to cap late fees is based on data suggesting that a fee of $8 should be sufficient for larger card issuers to cover collection costs incurred due to late payments. The rule also eliminates the automatic annual inflation adjustment for the late fee threshold, requiring credit card issuers to justify any fees above the $8 cap.
Industry Reaction
Financial giants and industry groups have criticized the new rule, arguing that it could lead to more late payments, damage credit scores, and potentially force credit card issuers to raise interest rates. The Bank Policy Institute, a bank trade group, has accused the CFPB of prioritizing politics over data-driven analysis. Consumer advocacy groups, on the other hand, have welcomed the change, emphasizing the disproportionate impact of late fees on economically vulnerable families.
Broader Efforts to Combat Junk Fees
President Biden has highlighted these new regulations as part of a wider initiative to reduce costs for Americans. This includes the formation of a ‘strike team’ to target predatory pricing and other unfair practices in various sectors such as healthcare, housing, and financial services. The administration’s efforts are also aimed at addressing the record-high credit card debt, which has surpassed $1.1 trillion, and the financial strain on specific demographics like Millennials and lower-income individuals.