Understanding the New Credit Card Late Fee Cap and How It Affects You

At O1ne Mortgage, we prioritize consumer education on credit and finance. We aim to provide you with the most relevant and objective information to help you make informed decisions. In this blog, we will delve into the recent changes in credit card late fees, how these changes will impact you, and ways to avoid late fees altogether.

Why Are Credit Card Late Fees Changing?

The Credit CARD Act of 2009 introduced broad consumer protections, including a cap on late fees. However, a loophole allowed credit card companies to charge fees up to $25 for the first late payment and $35 for subsequent late payments. These thresholds were adjusted for inflation, causing the average late fee to rise from $23 in 2010 to $32 in 2022. As a result, Americans paid over $14 billion in late fees in 2022 alone.

The Consumer Financial Protection Bureau (CFPB) has now finalized a new rule to cap credit card late fees at $8, which is expected to save Americans billions of dollars annually. This change comes as credit card debt in the U.S. surpassed $1 trillion at the end of 2023, with delinquency rates on the rise.

How Does the Credit Card Late Fee Cap Work?

The new rule applies to credit card issuers with more than 1 million open accounts, representing 95% of the total outstanding credit card balances in the U.S. Here are the main changes:

• Maximum late fee cut to $8: The rule reduces the maximum late fee to $8, which the CFPB says is sufficient for larger card issuers to cover collection costs.
• No inflation adjustment: The CFPB has removed the inflation adjustment provision, as card issuers were increasing fees without proof of increased costs. Future adjustments will be based on market conditions.
• Effective date: The rule will be effective 60 days after its publication in the Federal Register.

Exceptions to the New Rule

While the new cap applies to most credit card users, there are two exceptions:

• Smaller card issuers are exempt: Credit card issuers with fewer than 1 million open accounts aren’t subject to the new rule. However, the CFPB has found that smaller issuers already charge lower interest rates and fees.
• Larger card issuers can charge more if justified: Larger card issuers can charge more than $8 if they can provide evidence that they need to cover their actual collection costs.

How Will the New Credit Card Rule Affect Customers?

According to the CFPB, 45 million consumers are charged late fees each year. With the new rule, consumers are expected to save an average of $220 per year, collectively saving more than $10 billion annually. However, this rule doesn’t impact other actions card issuers can take against delinquent users, such as charging a penalty annual percentage rate (APR), revoking the account’s grace period, or reducing the credit limit.

5 Ways to Avoid Credit Card Late Fees

While late fees are decreasing, it’s still essential to pay your credit card bill on time to avoid other consequences. Here are five steps you can take to avoid late fees:

Set Up Automatic Payments

If you’re worried about forgetting to pay your bill, consider setting up autopay on your account. You can usually opt to pay the minimum amount due, the statement balance, the current balance, or another amount. Ensure you always have sufficient funds in your checking account to cover your costs to avoid a returned payment fee.

Request Alerts

Credit card issuers typically allow you to set up alerts via email or text, so you’ll be notified when your payment is due.

Change Your Payment Due Date

If your card’s due date doesn’t align with your payday or you have multiple cards with different due dates, it could make sense to adjust your due date to a more convenient time of the month.

Opt for a Card with No Late Fee

Most credit cards charge a late fee, but not all. It can take some shopping around, but it may be worthwhile if this is a concern.

Contact Your Card Issuer

If you’re struggling financially and aren’t sure whether you can pay the minimum amount due on your credit card, reach out to your card issuer to discuss potential options. Many card issuers offer hardship programs that could help you avoid late fees and get other forms of relief with your debt.

The Bottom Line

The CFPB’s new rule for credit card late fees can save credit card users hundreds of dollars each year, easing some of the financial burden of falling behind on payments. However, there are still several other consequences for missing a credit card payment, including potential damage to your credit score.

It’s crucial to make it a goal to pay your credit cards on time every month, preferably in full, to avoid interest charges. Consider using free credit monitoring services to know where your credit stands and steps you can take to improve it if necessary.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you navigate your financial journey with ease and confidence.