RSSAs the Consumer Financial Protection Bureau continues to pursue its proposed crackdown on “junk fees,” the agency released a report detailing the state of credit late fees, including the $12 billion consumers racked up last year.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 created a range of protections for cardholders, including limits on the amount companies could charge for penalties, such as over-the-limit fees and late fees, as well as on interest rate increases. A 2010 provision required penalties to be “reasonable and proportional” and included an annual inflation adjustment on limits.
Many major issuers — 18 out of the top 20 according to the report — charge the maximum late fee allowed under the parameters set in 2010. Currently, those limits are $30 for the first late payment and $41 for a subsequent late payment within 6 billing cycles.
Subprime and private label cards were more likely to rack up late fees. The average deep subprime account had $138 in later fees in 2020, and their late fees were a higher percentage of account balances (11 percent compared to 0.8 percent for super-prime accounts). For private label cards, late fees were 91 percent of all consumer fees and 25 percent of total interest and fees (compared to 45 percent and 7 percent, respectively, for general purpose credit cards).
Low-income areas, areas with high shares of Black Americans, and areas with lower economic mobility all paid more in credit card late fees, according to the report. In 2019, when total late fees peaked at $14 billion, consumers in the United States’ poorest neighborhoods paid twice as much on average in total late fees than those in the richest areas. Cardholders in majority-Black areas paid more in late fees for each card they held with major credit card issuers in 2019 than majority white areas. And people in areas with the lowest rates of economic mobility paid nearly $10 more in late fees per account compared to people in areas with the highest rates of economic mobility.
The report also found that late fee volume fell when stimulus checks arrived in 2020 and 2021, particularly for households with lower credit scores.
“Many credit card issuers have made late fee penalties a core part of their profit model. Markets work best when companies compete on price and service, rather than relying on back-end fees that obscure the true cost.” said CFPB Director Rohit Chopra. “Given their current practices, we expect that credit card issuers will hike fees, based on inflation, as limits continue to rise.”
Initially assigned to the Federal Reserve Board of Governors, the ability to adjust the CARD Act provisions was assigned to the CFPB by Congress.
