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Sunday, April 23, 2023

Consumers Don’t Actually Benefit From Credit Card Late Fee Caps

These fees are not hidden. Nor are they unfair.

Image Credit: iStock

The Biden administration has endorsed a proposal by the Consumer Financial Protection Bureau (CFPB) to cap all credit card late fees at $8 or 25 percent of the minimum periodic payment. If enacted, it would punish on-time borrowers with higher interest rates and restrict access to credit. The recent action is part of a broader effort by the administration to attack hidden and unfair “junk fees.” Despite what the administration believes, a new survey released on April 5 by the Consumer Bankers Association (CBA) reveals that consumers do not find credit card late fees hidden or unfair.

The White House’s endorsement mentions several fees that are “unfair, hidden [and] take money out of the pockets of American families.” These fees include ticket service, resort, family seating fees and others. Something all these fees have in common is they are usually excluded from the initial price of the item. Such fees can go unnoticed until checkout, resulting in more expensive purchases than customers initially believed.

Unlike fees tacked on at the end of checkout, late fees only apply to borrowers who do not pay their bills on time. Furthermore, these fees don’t come as a surprise — they’re well-known among credit card holders. In the CBA study, most consumers knew they had to pay late fees if they missed a credit card payment (though fewer knew this would affect their credit too).

Not only are these fees not hidden, but they also aren’t unfair. According to the American Bankers Association, credit card issuers lose an average of $38 every time a borrower fails to pay their bills on time. An $8 cap on fees would force issuers to incur losses on late payments that they would cover through higher rates and more restrictive credit. Such an outcome would be highly unfair to borrowers who pay on time since they will likely foot the bill.

Though both the Biden administration and the CFPB seem to be ignoring these facts, consumers aren’t. The CBA’s survey revealed that most Americans do not believe that credit card late fees constitute illegitimate “junk fees.” The vast majority of those surveyed (76 percent) responded that paying debts on time was the personal responsibility of the borrower.

These findings reflect the facts regarding the negative impact of credit card late fee caps. A poll by North Star Opinion Research found that a majority of respondents believed decreasing the severity of late fees would result in a higher quantity of late fees, which is also born out by the evidence. These surveys reveal that consumers understand far more about late fees than many administration officials may realize.

Together, these surveys paint a clear picture. Consumers, by and large, do not benefit from caps on late fees and know it. Not only that, but it would seem consumers largely agree with the underlying premise of a credit card late fee and think they excel in their mission. Any measure that aims to “protect” borrowers from late fees is going against the wishes of consumers.

Editor’s Note: An earlier version of this article mistakenly used the term creditor when referring to borrowers.

  • Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization.