CFPB proposes a $8 cap on credit card late fees: What it means for you

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The Consumer Financial Protection Bureau (CFPB) has recently proposed a new rule limiting credit card late fees to just $8 — a sharp drop from the typical fee of $32. 

The cap addresses "excessive" credit card late fees, potentially saving consumers billions of dollars each year. According to the CFPB, the new rule will save about 45 million consumers an average of $220 annually. 

Exorbitant fees were originally banned in 2009 under the CARD Act, aimed at ensuring late fees don’t surpass the banks' actual costs from delayed payments. But, the CFPB claims the law left open a loophole that banks and other financial institutions exploit to continue charging these fees.

Not surprisingly, the credit card industry is not happy. In response, banks and business groups have sued, alleging that this ruling would result in more late payments, higher debt, and less access to credit.

But what does this mean for your wallet? Here are the potential winners and losers of this rule change — and what you should do in response.

Winners: Consumers who occasionally pay late

 If you're someone who occasionally misses a credit card payment deadline, you're likely to be a winner under the CFPB's proposed rule. Instead of being hit with a $30+ late fee, you'll only be charged $8. 

This could save you significant money over time, especially if you have multiple credit cards or tend to miss payments more than once. 

The ruling may even protect those with a minor slip-up, like a payment that doesn’t go through, explains financial expert and entrepreneur Brooks M. Conkle. 

“As a credit card user that pays off balances in full each month, I've had instances where a payment failed to go through, and I had to fight to waive the late fees,” he says. “This rule would solve that issue.” 

Plus, this rule could provide a much-needed lifeline if you're a low-income or financially struggling consumer. Late fees can quickly add up and create a cycle of debt that's hard to escape. 

By reducing these fees to $8, the CFPB is giving these consumers a better chance to get back on track financially.

Losers: Credit card issuers 

Credit card issuers will likely be the biggest losers under the CFPB's proposed rule. Late fees have been a significant source of revenue for these companies, with some issuers collecting tens of millions in late fees each year. 

The $8 cap could lead to a big loss of revenue, which could have ripple effects throughout the industry. 

To offset this lost revenue, credit card issuers may increase other fees, such as annual or interest rates. They may also tighten credit standards, making it harder for some consumers to qualify for credit cards in the first place. 

Some issuers may even remove or reduce rewards and perks. The cap may also normalize late payments and jeopardize consumers’ financial health, says Lindsey Johnson, CEO of the Consumer Bankers Association. While the CFPB's rule is designed to protect consumers, it could inadvertently make credit less accessible for some. 

“While the Administration is messaging this rule as a ‘win’ for consumers going into an election year, it’s anything but,” Johnson says. “By normalizing being late on credit card payments, the Administration is knowingly putting consumers’ financial health at risk.”

What this means for most consumers

Around 50% of cardholders don’t carry a balance month over month, according to a recent Bankrate survey. 

That means they won’t face any late fees or interest charges — and likely won’t notice. If cards reduce rewards or other perks in response to the ruling, a broader group of consumers may be affected. But until then, as long as you pay your credit card bill on time and in full each month, you won’t see a difference.

Late payments still have negative consequences

If you miss a payment, you may face a lower fee, but there are still downsides. Payment history is one of the biggest contributors to your credit score — one missed payment can cause your score to drop. Plus, you’ll also face interest charges.

The average American has a credit card balance of $6,501. If you carry that balance month over month at the average interest rate of 20.75% — you’d owe $111.79 in interest each month. That amount will continue to snowball, which can quickly become unmanageable. 

"The late fee isn't your biggest headache," explains financial planner and educator Nadia Vanderhall. "It's the APR. The $8 cap eases fee burdens but doesn’t even touch the deeper issue — the interest."

It could become harder to get credit

Unfortunately, the rule won't stop issuers from raising interest rates or cutting credit lines to discourage late payments. 

Subprime cardholders, often on the edge of creditworthiness, stand to lose significantly. With only half of them managing timely payments, reduced late fees might lead issuers to mitigate risks by tightening credit. 

That means getting approved for credit cards — particularly the best credit cards with premium perks and rewards could become harder.

How consumers should react

So, what should you do as a consumer in light of the CFPB's proposed rule? First and foremost, it's important to remember that this rule is not yet set in stone. It's still in the proposal stage and could change before it's finalized. 

That being said, there are a few steps you can take to prepare for these potential changes: 

• Review your credit card agreements: Take a close look at your current credit card terms and conditions. Keep an eye out for changes in late fees, annual fees, or interest rates, and be prepared to shop around for a better deal if necessary. 
• Set up automatic payments: One of the best ways to avoid late fees is to set up automatic payments for your credit card bills. This way, you'll never miss a deadline, even if you forget to make a manual payment. 
• Create a budget: If you struggle to make credit card payments on time, it may be helpful to create a budget. By tracking your income and expenses, you can ensure that you have enough money set aside each month to cover your credit card bills. 
• Communicate with your issuer: If you're facing financial hardship and are worried about missing a payment, contact your credit card issuer. Many issuers offer hardship programs or temporary payment deferrals to help you avoid late fees and other penalties. 

The golden rule of credit card use remains unchanged: don't carry a balance. Paying off your bill every cycle means you'll never worry about late fees or interest.

Bottom line

The CFPB's proposed $8 cap on credit card late fees is a game-changer for consumers. While issuers may take a financial hit, the rule could provide much-needed relief for struggling consumers. 

As a consumer, it's important to stay informed about these changes and take proactive steps to protect your money. 

You can navigate these changes by reviewing your credit card agreement, setting up automatic payments, creating a budget, and communicating with your issuer when necessary.

Editorial disclaimer: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.