As consensus builds to eliminate unfair and anti-competitive “junk fees” across the economy, credit card issuers have continued to extract billions in revenue from their customers in late fees, aided by a decade-old regulatory “safe harbor” loophole. However, a new CFPB rule aims to drastically reduce credit card late fees, make paying down credit card debt easier, and save Americans $9 billion yearly.

The Fee Fiasco

After changing careers, Elizabeth Blascruz ran into some financial issues. She received an offer for a credit card in the mail, and after using the card, she went to pay her bill. But she was late on her payment, and as a result she was slapped with a late fee, and her interest rate increased. Since the amount she owed exceeded her credit line, she was ordered to pay another fee for that, too. She couldn’t afford the fees, so the amount stayed on her balance for months, compounding over time with interest. All told, Blascruz ended up paying over $2,500 more than her original $480 bill.[1]

Blascruz’s story was documented in a 2009 PBS documentary called “The Card Game,” which examined the consumer finance industry in the wake of the 2008 financial crisis. Outrage at banks and credit card companies for hidden fees and volatile interest rates swept America and spotlighted an extractive, unsustainable business model, shattering trust between financial services companies and their customers.

To address the issue, Congress passed the bipartisan Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the CARD Act. The legislation established new transparency requirements for the credit card market to protect American consumers against deceptive and abusive behavior from credit card companies. The regulations, which banned a plethora of tricks and underhanded tactics employed by card issuers, had significant impact. In 2015, a study analyzing data from 160 million credit card accounts found that the CARD Act has saved consumers almost $12 billion annually in credit card fees since its passage.[2]

Today, however, Americans continue to pay more and more in credit card fees. Credit card issuers, including companies like Discover and American Express as well as big banks like Wells Fargo and Citi, continue to profit from late fees using a regulatory safe harbor from the CARD Act. Late fees, which are the most significant credit card fee Americans face in both dollar amount and frequency, remain a profit center for card issuers. Consumers, particularly low-income Americans, foot the bill. Americans paid $14.5 billion in late fees in 2022, eclipsing the amount that the CARD Act saved consumers in the first place.[3]

To rein in these exorbitant charges, the Consumer Financial Protection Bureau (CFPB) in 2023 outlined a new rule that would greatly curb excessive credit card late fees and save Americans $9 billion annually. Americans overwhelmingly support regulatory action to rein in credit card late fees, with one poll showing 82% approval for limiting the size and frequency of credit card late fees.[4] During the rule’s comment period, the CFPB received 57,000 comment letters on the rulemaking, with 56,000 of those in support.[5]

Who Is Affected by Credit Card Late Fees?

Industry data shows that accounts paying the most in late fees are owned by cardholders with lower credit scores, and that Americans with lower credit scores are much more likely to pay repeat late fees. For example, an account with a credit score below 580 (considered a “deep subprime” score) paid on average $138 in late fees in 2019, compared to just $11 for an account with a score of 720 or above (considered “superprime”).[6]

In fact, just 12% of all credit card accounts paid 42% of the $14 billion in credit card late fees extracted from Americans in 2019. This suggests that late credit card payments are essentially a poor tax, preying on low-income Americans with poor credit, further trapping them in a cycle of debt and making it even harder to climb out.[7]

These numbers may in fact even downplay the effect of late fees on consumers, since they were determined on an account basis, not a per consumer basis — because one consumer may have multiple accounts, each of which will levy a late fee. A cardholder with a deep subprime credit score, for example, holds on average two credit cards, meaning that the consumer could pay in total double the average $138 in yearly late fees.

Accordingly, these burdens fall distinctly along race and class lines. Like most financial services junk fees — such as bank overdraft fees and nonsufficient funds fees — credit card late fees disproportionately target the least wealthy Americans. Credit card late fees are negatively correlated with indicators of upward economic mobility and entrench economic inequality across race and class. In 2019, Americans in the country’s poorest neighborhoods paid on average double the late fees of those in the richest areas, while cardholders in majority-Black areas paid more than those in majority-white areas.[8]

Thus, the CFPB has correctly described credit card late fees in 2022 as a “penalty on households living paycheck-to-paycheck rather than a meaningful incentive to make on-time payments.”[9]

Context: The CARD Act and Late Fees

Late fees were exactly the type of opaque, excessive penalty that the CARD Act aimed to crack down on. With credit cards America’s most widely used form of consumer credit, the CARD Act’s protections better shielded Americans from surprise interest rate increases, required credit card companies to communicate their terms more transparently, and gave people enough time to pay their bills.

While the CARD Act banned unreasonable penalties, it allowed card issuers to continue charging late fees on the condition that they prove the fee was “reasonable and proportional” to the infringement.[10] However, the Federal Reserve handed credit card companies a loophole known as the “safe harbor” exemption: they didn’t have to prove their late fees were reasonable or proportional as long as they charged under a certain threshold. The safe harbor, which the CARD Act allowed but did not require, was first set by the Fed at $25ith an exception allowing credit card companies to charge $35 if the cardholder was late multiple times in a row. The Fed also allowed the fees to continue to rise with inflation.

Card issuers weren’t required to use the safe harbor. For instance, they could charge higher fees if they showed their math and demonstrated that the fees met the “reasonable and proportional” standard and reflected the costs of collecting a late payment.[11] Because the safe harbor saves card issuers the money and time they would have had to spend on the administrative costs and burden of calculating a reasonable and proportional late fee, no card issuers charge fees that way.

Overall, as a result of the CARD Act, credit card late fees dropped significantly.[12] Late fees, which averaged $33 before the 2009 CARD Act, dropped. Just one year after the passage of the CARD Act, the average late fee had fallen to $23.[13]

Since then, however, late fees have risen with inflation, and are back around the $30 mark, with the repeat late fee at $41. In 2022, Americans paid $14.5 billion in credit card late fees. No evidence suggests that credit card companies are “showing their math” — that is, charging late fees based on what is reasonable and proportional to the cost of collecting them. Instead, card issuers simply charge the maximum allowed by the safe harbor every year, padding their bottom line. Based on outstanding balances, 18 of the top 20 card issuers now charge a maximum late fee at or near the higher safe harbor amount.[14] The CFPB estimates that credit card companies are charging Americans late fees that are five times the collection costs of accepting a late payment.[15]

Ultimately, the safe harbor skirts the original aims of the CARD Act, which intended to ensure that any fees corresponded to real costs for the credit card issuer. Instead, the safe harbor has led credit card late fees to become a regulator-approved junk fee that card companies enjoy as a lucrative profit center. Furthermore, by permitting a larger fee for cardholders who have missed multiple payments — who tend to be lower-income — it acts as a punitive measure, by which the fees are justified by the behavior of the cardholder rather than the costs to the bank.

The Fix

The solution proposed by the CFPB to rein in credit card late fees is simple: lower the safe harbor threshold to an amount that better reflects what late payments actually cost issuers.

This change would leave in place the safe harbor originally created by the Federal Reserve, allowing credit card companies to continue charging late fees. However, instead of automatically presuming today’s $30 (which rises to $41 for repeat missed payments) to be “reasonable and proportional,” the new safe harbor amount would be set at $8, a number arrived at after a CFPB assessment of industry data.[16] The rule would also cap late fees at 25% of the minimum payment as well as end hikes for inflation.

While the CFPB has acknowledged that $8 may not cover the costs of late payment collection for every card issuer in every instance, it removes the incentive for card issuers to continue to charge above the costs of collecting simply because they can. These kinds of penalties, described as “super-compensatory,” contradict the intent of the 2009 CARD Act, whose regulations sought to prevent card issuers from creating profit centers out of late penalties and other junk fees and tricks.[17] Because they create a conflict of interest between the company and the consumer, super-compensatory penalties are inherently dangerous and abusive. With late fees being a multibillion-dollar source of profit for card issuers, issuers are disincentivized to help customers avoid the charges. In fact, they have a financial interest in cashing in on more lucrative penalties.

The CFPB rule doesn’t only eliminate the super-compensatory element of credit card late fees, however. Card issuers are still free to charge above the safe harbor, provided they can show their math. For example, if an issuer believes that the new $8 safe harbor isn’t enough to cover the costs of collection, the issuer may charge a higher amount — as long the issuer can provide justification that the fee amount is reasonable and proportional.

Lowering the late-fee safe harbor may also benefit consumers in other ways — for example, by spurring card issuers to invest in ways to reduce late payments that don’t revolve around collecting fees. Issuers have already demonstrated that they can use tactics other than fees to reduce late payments. For example, after upgrading its alert system to give customers better warning when payment due dates approached, one issuer reported that within months its “gross monthly late fees were 20 percent lower and the late fee incidence rate per balance had fallen by nearly 25 percent.”[18]

About half of consumers who miss a payment end up making a payment less than 10 days past the due date. In fact, the reporting process used by the credit card industry in reporting consumer payment information to credit reporting firms like Equifax or Experian does not even consider a payment late until it is 30 or more days past due — by which time the CFPB estimates a majority of outstanding accounts make a payment to become current.[19]

Credit Card Industry Spin

Card issuers and their lobby groups make a variety of disingenuous arguments, that today’s high credit card late fees “support a safer credit card market” and “promote better financial decision-making,” citing the “deterrence” effect of high late fees to “incentivize” consumers to pay on time.[20] To defend the status quo, the credit card industry has ramped up lobbying, threatening higher credit card costs and restricted access to credit if the CFPB rulemaking is implemented.[21] Many of the credit card lobby’s protests about the CFPB rulemaking echo those raised to oppose the 2009 CARD Act. However, evidence from recent years shows that industry warnings about the CARD Act never materialized, and that those same arguments have even less merit today.[22]

First, the credit card lobby argues that lower late fees will lead Americans not to pay their bills on time.[23] But beyond the historical record, which shows that the 2009 CARD Act reforms that slashed fees did not cause Americans to pay late more often, evidence also suggests that late payments are not an issue of insufficient deterrence.[24] That is, late credit card payments are often a product of Americans simply not having enough money due to an unexpected expense[25] or general financial strain, [26] or due to not having enough advance notice to make a payment by the due date.

To the degree that deterrence is an issue, the CFPB also found that a lower safe harbor amount of $8 would still provide an effective deterrent to late payments, particularly since the cost of a late payment is not isolated just to the late fee itself. For example, penalties for a late payment reach beyond one-time fees and can have longstanding consequences like an increased interest rate, which can quickly balloon a cardholder’s balance, impacting the consumer more than any late fee. Taking this into account, the CFPB determined that the industry’s already-high interest on revolving balances already provides a significant deterrent to late payments.[27]

Second, the credit card lobby maintains that the current safe harbor limit of $30 to $41 is reasonable and proportional. However, after the CFPB requested information from credit card companies to verify the actual costs of collecting late payments, the industry declined to provide it.[28] Issuers have not substantiated their claims that the cost of collecting late payments is equal to or greater than the current safe harbor late-fee amount.[29]

Third, the credit card industry also claims that reduced late fees would require other cost increases to consumers to make up lost revenue,[30] such as increased interest rates or reductions in credit card rewards.[31] Available evidence suggests these claims are false.[32] Though card issuers and their lobbyists have dangled threats of eliminating credit card rewards in response to any late fee rulemaking, similar arguments have been trotted out against other credit card regulation, such as the Credit Card Competition Act, despite evidence to the contrary.

And although the CFPB has succeeded in saving Americans more than $5 billion yearly by pushing banks to eliminate or vastly reduce other similarly lucrative super-compensatory bank fees like overdraft and nonsufficient funds fees, these reductions have come without increased costs for consumers.[33] Additionally, with late fees at their current amount, credit card interest rates are already at a record high.[34] In fact, the credit card industry charges the highest interest rates of any mainstream consumer debt by a large margin.[35] Taken together, the evidence suggests card issuers’ warnings of reduced rewards and increased costs and fees are implausible consequences.

Conclusion

Americans’ reliance on credit cards to make ends meet makes them vulnerable to the companies controlling their intensifying debt burden, with harmful consequences. Returning credit card late fees back to a reasonable and proportional level, as set out by the 2009 CARD Act, will offer Americans much-needed relief from an exploitative junk fee and allow consumers to pay off debt more easily. Reining in the safe harbor to an amount that is proportional to the costs of accepting a late payment — instead of five times that amount — will eliminate the super-compensatory junk fee nature of the credit card late fee, allowing Americans to pay down more of their balances and address credit card debt as it rises to record levels.

[1] “The Card Game,” PBS Frontline, Documentary, November 24, 2009, https://www.pbs.org/video/frontline-the-card-game/.

[2] Sumit Agarwal et al., “Regulating Consumer Financial Products: Evidence from Credit Cards,” 130 Quarterly J. of Econ., at 111–164, February 2015, https://doi.org/10.1093/qje/qju037.

[3] “The Consumer Credit Card Market,” Consumer Financial Protection Bureau, October 2023, https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2023.pdf.

[4] “New Bipartisan Polling Shows Support for Financial Regulation,” Lake Research Partners and Chesapeake Beach Consulting, September 29, 2023, https://ourfinancialsecurity.org/wp-content/uploads/2023/10/AFRCRL_poll-lakeresearch-cfpb-sep2023.pdf.

[5] Jeanne Sahadi, “Why credit card late fees may drop to $8,” CNN, July 10, 2023, https://www.cnn.com/2023/07/10/business/credit-card-late-fees-drop/index.html.

[6] Notice of Proposed Rulemaking: Credit Card Penalty Fees (Regulation Z), 88 FR 18906, February 1, 2023, https://www.federalregister.gov/documents/2023/03/29/2023-02393/credit-card-penalty-fees-regulation-z/.

[7] “Credit card late fees,” CFPB, March 2022, https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees_report_2022-03.pdf.

[8] “Credit card late fees,” CFPB, March 2022, https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees_report_2022-03.pdf.

[9] “CFPB Finds Credit Card Companies Charged $12 Billion,” CFPB, March 29, 2022, https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-credit-card-companies-charged-12-billion-in-late-fee-penalties-in-2020/.

[10] Regulation Z Introduction, Federal Reserve Board of Governors, 2010, https://www.federalreserve.gov/boarddocs/caletters/2010/1010/10-10-attachment.pdf.

[11] Ibid.

[12] “CARD Act Report: A Review of the Impact of the CARD Act on the Consumer Credit Card Market,” CFPB, October 2013, https://www.consumerfinance.gov/data-research/research-reports/card-act-report/.

[13] Ibid.

[14] NPRM: Credit Card Penalty Fees (Regulation Z).

[15] NPRM: Credit Card Penalty Fees (Regulation Z).

[16] The CFPB used Y-14 data submitted by credit card issuers, among other information, to reach the conclusion that $8 for the first and subsequent violations would cover issuers’ costs from late payments. See 43 NPRM: Credit Card Penalty Fees (Regulation Z).

[17] Comment of Consumer Groups on Credit Card Late Fee NPRM, May 3, 2023, https://www.nclc.org/wp-content/uploads/2023/05/Consumer-Groups-Comments-to-Credit-Card-Late-Fee-NPRM.pdf.

[18] NPRM: Credit Card Penalty Fees (Regulation Z).

[19] NPRM: Credit Card Penalty Fees (Regulation Z).

[20] Paul Calem, “The Role of Credit Card Late Fees in Encouraging Timely Repayment Is Essential to Efficient Functioning of the Market,” Bank Policy Institute, January 18, 2023, https://bpi.com/the-role-of-credit-card-late-fees-in-encouraging-timely-repayment-is-essential-to-efficient-functioning-of-the-market.

[21] Sam Sutton, “Washington goes to war over rewards programs,” Politico, July 20, 2023, https://www.politico.com/news/2023/07/20/junk-credit-card-fees-war-00105958.

[22] The Journal of Legal Studies, “A Simple Framework for Estimating Consumer Benefits from Regulating Hidden Fees,” Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney, Johannes Stroebel, June 2014, p. S241, https://pages.stern.nyu.edu/~jstroebe/PDF/JLS_ACMS.pdf.

[23] Calem, “The Role of Credit Card Late Fees.”

[24] Sumit Agarwal et al., “Regulating Consumer Financial Products: Evidence from Credit Cards,” NBER Working Paper 19484, September 2013, https://www.nber.org/system/files/working_papers/w19484/w19484.pdf.

[25] For example, one 2022 survey found that three-quarters of Americans with credit cards made a late payment in the previous two years, and that of that number, 43% missed a payment because they needed the money for essentials, with another 27% reporting that an unexpected expense prevented them from paying on time. See Becky Pokora and Caroline Lupini, “75% Of Americans Have Missed Credit Card Payments Due To Covid-19,” Forbes, March 3, 2022, https://www.forbes.com/advisor/credit-cards/75-of-americans-have-missed-credit-card-payments-due-to-covid-19/.

[26] A documented drop in late payments after pandemic stimulus checks in 2020 and 2021 suggests cash injections allowed Americans who otherwise would not have been able to make on-time credit card payments to remain current, lending support to the position that late fees operate more as “a penalty on households living paycheck-to-paycheck rather than a meaningful incentive to make on-time payments.” See “CFPB Finds Credit Card Companies Charged $12 Billion,” CFPB, March 29, 2022, https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-credit-card-companies-charged-12-billion-in-late-fee-penalties-in-2020/.

[27] NPRM: Credit Card Penalty Fees (Regulation Z).

[28] Credit card firms’ opacity on the true costs of collecting late payments has also drawn congressional attention. In May 2023, seven Democratic senators, including Senator Elizabeth Warren, directed major credit card issuers like JP Morgan, Citigroup, and Bank of America to turn over information about the true costs of collecting late payments. See “Senators Warren, Brown, Lawmakers Seek Answers from Credit Card Issuers on Exorbitant Late Fees,” Office of Senator Elizabeth Warren, May 9, 2023, https://www.warren.senate.gov/oversight/letters/senators-warren-brown-lawmakers-seek-answers-from-credit-card-issuers-on-exorbitant-late-fees.

[29] Letters from Credit Card CEOs to the Office of Senator Elizabeth Warren, May 23, 2023, https://www.warren.senate.gov/imo/media/doc/Late%20Fee%20Responses.pdf.

[30] “CFPB Proposed Rule On Credit Card Late Fees Is Not What It Seems,” Consumer Bankers Association, April 17, 2023, https://www.consumerbankers.com/cba-media-center/media-releases/cfpb%E2%80%99s-proposed-rule-credit-card-late-fees-not-what-it-seems; “CFPB Proposed Rule,” Consumer Bankers Association.

[31] See Bill Hulse, “CFPB Moves to Punish People Who Pay Their Credit Card Bills On Time,” U.S. Chamber of Commerce, June 12, 2023, https://www.uschamber.com/finance/the-cfpb-moves-to-punish-people-who-pay-their-credit-card-bills-on-time; Shahid Naeem, “Myth vs. Fact: The Credit Card Competition Act of 2023,” American Economic Liberties Project, September 2023, https://www.economicliberties.us/wp-content/uploads/2023/09/20230807-AELP-MythFact-CCCA_v5-1.pdf; Christian Johnson, “Rewards Margins are High-Enough to Withstand Competition,” CMSPI, https://cmspi.com/nam/en/resources/content/rewards-margins-are-high-enough-to-withstand-competition/.

[32] For example, while one bank lobby group wrote that banks may be forced to drastically alter their business models if late fees are reduced, card issuers have said that late fees are a small portion of their overall revenue. Discover CFO John Greene has publicly admitted that late fees make up around 4% of the company’s revenue, while American Express put that number at less than 1%. See Caitlin Mullen, “Card issuers defend late fees,” Payments Dive, July 6, 2023, https://www.paymentsdive.com/news/credit-card-issuers-defend-late-fees-payments-cfpb-warren-amex-discover-jpmorgan/685110/; Letters from Credit Card CEOs to the Office of Senator Elizabeth Warren.

[33] “Overdraft/NSF revenue down nearly 50% versus pre-pandemic levels,” CFPB Data Spotlight, May 23, 2023, https://www.consumerfinance.gov/data-research/research-reports/data-spotlight-overdraft-nsf-revenue-in-q4-2022-down-nearly-50-versus-pre-pandemic-levels/.

[34] Greg Iacurci, “Credit card rates are practically in ‘loan shark’ territory as they hit record highs, advisor says,” CNBC, September 21, 2023, https://www.cnbc.com/2023/09/21/credit-card-interest-rates-near-loan-shark-territory-advisor-says.html.

[35] In the second quarter of 2023, average interest rates for student, auto, and home loans clocked in at 5%, 6.6%, and 7.6%, respectively, while the average credit card APR is now above 21%. See Erica Lamberg, “Paying credit card debt down is getting harder,” Fox Business, September 23, 2023, https://www.foxbusiness.com/personal-finance/why-paying-off-credit-card-debt-getting-harder.