Biden Administration Proposes $8 Credit Card Late Fee Cap, Industry Warns of Higher Interest

By John Lopez

Mar 06, 2024 11:14 AM EST

The Biden administration recently proposed a cap on credit card late fees at $8, aiming to alleviate the financial burden on American consumers. However, industry experts caution that this move could potentially increase interest rates.

The Consumer Financial Protection Bureau (CFPB) stands behind this initiative, citing that the proposed cap would collectively save consumers a substantial $10 billion.

CFPB Director Rohit Chopra emphasized the importance of ending what he calls a decade-long exploitation of consumers by credit card companies through excessive late fees.

(Photo : Photo Illustration by Justin Sullivan/Getty Images)
SAN ANSELMO, CALIFORNIA - FEBRUARY 07: In this photo illustration, a credit card is used to pay for gasoline on February 07, 2024 in San Anselmo, California. According to a report by the Federal Reserve Bank of New York, credit card debt in the United States has reached $1.13 trillion.

Biden's Move to Crack Down on 'Junk' Fees

President Biden's administration has prioritized tackling these so-called "junk" fees, evident in the formation of a task force targeting unfair pricing schemes. The proposed rule, if implemented, would limit the maximum late fee from the current average of $32 to just $8, offering significant relief to American families.

However, the credit card industry and financial associations strongly oppose the proposed rule. It could have unintended consequences, potentially leading to more late payments, lower credit scores, and, ultimately, higher consumer interest rates.

Bankers Oppose Capping Credit Card Late Fees

Rob Nichols, President and CEO of the American Bankers Association (ABA), criticized the proposal, labeling it as flawed. He warns that capping late fees below the actual costs incurred by banks would force them to tighten standards for new accounts, reduce credit lines, and raise Annual Percentage Rates (APRs) for all consumers, including those who consistently pay on time.

Lindsey Johnson, President and CEO of the Consumer Bankers Association, echoed similar concerns, stating that the proposed rule's policy goals are more focused on consumer redistribution than consumer protection.

In response to the proposed rule, the U.S. Chamber of Commerce has announced its intention to sue, claiming that the CFPB has exceeded its authority. The Chamber argues that the rule would punish responsible credit card users by forcing them to subsidize late payments.

The proposed $8 cap on late fees would only apply to large credit card companies, which currently have the liberty to charge up to $30 for the first late payment. The CFPB has conducted a thorough review of market data to arrive at the proposed cap, aiming to ensure that it accurately reflects the costs incurred by issuers.

Despite industry pushback, the CFPB remains steadfast in its commitment to protecting consumers from excessive late fees. The final rule, if enacted, would provide much-needed relief to millions of Americans burdened by high credit card fees.

The proposed $8 credit card late fee cap has sparked intense debate within the financial industry. As stakeholders continue to voice their concerns and opinions, the fate of the proposed rule remains uncertain.

Sectors