A new ruling from the Consumer Financial Protection Bureau (CFPB) under the Biden administration has made a huge change in how large credit card companies can charge late fees. Under previous legislation, credit card companies took advantage of a loophole that allowed them to charge an average late payment fee of $32. Now, the CFPB has slashed that number to just $8 in an effort to get rid of credit card “junk fees.” The new fee structure is currently set to go into effect on June 1, 2024.
Find out how this dramatic change could benefit your credit card debt payoff plan and what potential drawbacks may come from it as credit card companies look for ways to drum up new revenue.
Why Credit Card Fees Are a Hot Topic in 2024
According to the CFPB, Americans pay a total of $14 billion per year in credit card late fees. These extraordinary costs don’t help the growing amount of credit card debt among consumers. In 2023, the average credit card balance reached $6,500. That’s a 10% increase from 2022, which is a huge jump.
And members of Gen Z are accruing balances at an even higher rate than other age groups. They’ve added an extra 20% to their credit card totals, according to a study performed by Credit Karma. Stagnant wages and high inflation rates both contribute to all generations adding more credit card debt, but Gen Z is clearly getting hit the hardest.
In addition to growing balances, people are also having a tougher time making their payments. The number of cardholders in serious delinquency (which means more than 90 days past due) rose from 4.01% to 6.36% between the third quarter of 2022 and 2023.
Missing a payment can result in a hefty late fee, which is then added to the card balance and begins to accrue interest. Clearly, many Americans with credit cards are struggling to manage their debt without adding more.
These growing concerns contributed to the CFPB taking action under President Biden’s administration, along with the amount of fees and interest collected by credit card companies. The CFPB also noted that fees should decrease as credit card companies are cutting costs thanks to more streamlined digital practices.
So what kind of impact can you expect on your own credit card balance with this new rule in place?
How the New Credit Card Fee Limits Will Impact Gen Z
Most members of Gen Z are poised to benefit from this new ruling at first glance. While smaller credit card issuers are exempt (those, who together with their affiliates have fewer than one million active credit card accounts), the CFPB ruling applies to 95% of outstanding balances in the U.S. So there’s a pretty good chance that you could see a reduction in your late fees in a few different ways:
- Monthly late fee is limited to $8
- $8 for each subsequent late payment
- Credit card companies can’t increase fees annually due to inflation
Let’s look at this in a hypothetical situation. Say Liam has a credit card balance and made late payments for six months in a row during a single year. Under the previous rules, his credit card company charged him $25 for the first late payment, then bumped up that fee to $35 for any late payment made within the next six months.
Over one year, six late fees added $200 in new charges to his balance. On top of that, the credit card company charged interest on the extra balance, adding even more to his debt.
With the new ruling, Liam would pay much less in the same situation. Instead of adding $200 in late fees to his balance, getting charged $8 every month for six months of late payments only cost him a total of $48 per year. He could use the saved funds to pay an extra $150 off his balance or put the funds towards his living expenses.
Potential Drawbacks of the New Rule
Some critics worry that the new CFPB rules could actually harm consumers instead of helping them. Here are a few of the arguments against the late fee reduction.
Potential price increases elsewhere: Credit card companies could try to recoup the lost revenue from late fees by raising other costs for cardholders. This could include things like higher interest rates, balance transfer fees, and annual card fees. It’s too soon to tell how much of an impact this could have on your own credit card, but it’s worth keeping an eye on these expenses to see if they increase.
Stricter eligibility standards: With smaller late fees, some credit card companies may make it harder to qualify for a card if you have bad credit or don’t have an established credit history. While the late fee limit is meant to help borrowers with lower income levels and credit scores, it could end up hurting them if they can’t access as much credit.
Late fees still add to debt: Missing payments on your credit card adds to your balance and can hurt your credit score. If an individual decides to skip a payment because of a cheaper late fee, they could still hurt their finances – and some argue that lower fees are likely to trap some people in a cycle of debt.
What to Watch For
The new CFPB rule isn’t in effect yet; in fact, it’s not set to get started until June 1, 2024. In the meantime, lawsuits have already sprung up from the U.S. Chamber of Commerce and a number of other business and banking associations.
It may take time for the legal battles to play out and give consumers a clear answer on what to expect from credit card fees in the months ahead.