CFPB Credit Card Late Fee Goes into Effect

The much-derided Credit Card Late Fee Rule from the Consumer Financial Protection Bureau (CFPB) has now been implemented. The agency says the rule “bans excessive credit card late fees,” capping them at eight dollars. This is down from an average of $32. This rule is part of a larger effort to ban or forcibly reduce what the agency refers to as “junk fees,” a catch-all term for financial institution fees.

While the idea of capping late fees may sound appealing, the unintended consequences to consumers are wide-ranging and serious. Below we explore several major issues with the late fee rule as it stands.

Disincentivizes Good Financial Behavior

In part, late fees serve as an incentive to pay credit card bills on time. When bills go unpaid or are underpaid, credit scores are affected. This makes it more difficult for people to obtain all types of financial products, including mortgages and loans, and can even affect things like apartment leases and job opportunities.

Additionally, failure to pay on time can lead to a snowball effect. As interest piles on and additional purchases are made, the amount owed grows, making it more challenging to pay off.

Credit card companies and credit unions, in conjunction with issuing banks, setting their own late fees is an important aspect of the credit card agreement. Fee structures are determined based on a myriad of factors that incentivize on-time payments and often consider the cardholders payment history. Transparency is key: Consumers should know what they are paying. But when both parties agree upon fees, including in credit card agreements signed by the cardholder, the federal government should not have a role in mandating private company pricing.

Reduces Access to Credit

Potentially the most serious negative impact to consumers of the late fee rule is the downstream effect of reduced access to credit. When late fees are forcibly reduced, this naturally leads companies to cut corners in other areas. The easiest and most logical solution is reducing access to credit for the riskiest group of borrowers—those with low income and low credit scores. For riskier borrowers, their likelihood to pay on time is already diminished. When fees are federally mandated to be, on average, one quarter of their previous price, this will further reduce the instance of on-time payments to the detriment of both borrower and borrowee. Credit card companies essentially cannot afford to lend to riskier borrowers without appropriate measures in place, including late fees.

Forcibly Reduces Revenue

The forcible decrease of revenue through government-mandated fee reduction causes broader economic strain, some of which is unknowable and incalculable until after the fact. This includes effects on company stock prices, where millions of Americans hold direct investments and retirement savings. Further strain to credit card companies is possible with regards to job availability: When the bottom line is reduced, cuts must be made. Finally, this could lead to rising fees for individuals who routinely exhibit good financial behavior and pay on time, ultimately punishing them for their efforts.

Though the rule has gone into effect, efforts to overturn it are underway. A Congressional Review Act in the Senate, led by Sen. Tim Scott (R-S.C.), was introduced on April 8. Companion legislation, led by Andy Barr (R-Ky.), passed the House Financial Services Committee on April 17.

The R Street Institute supports efforts to overturn the destructive and ill-advised rule, the ultimate outcome of which will be detrimental to consumers nationwide.