HomeCredit CardsAre Credit Card Late Fees Beneficial for Consumers?

Are Credit Card Late Fees Beneficial for Consumers?

Examining the Impact of Credit Card Late Fees: Balancing Consumer Protection, Profitability, and Behavioral Incentives

Inflationary pressures have caused the cost of goods to rise, and concurrently, credit card late fees have also increased. This surge is due to a provision in the 2009 Credit Card Act, enabling credit card issuers to raise late fees. These fees have now reached maximum levels of up to $41.

The Consumer Financial Protection Bureau (CFPB) recently proposed capping credit card late fees at $8 per late payment, a reduction of 75% from the previous maximum.
Although decreased costs can appear to be beneficial for customers, some contend that doing so could have unanticipated negative effects.
Such a reduction, according to the American Bankers Association, “will result in more late payments, higher debt, and lower credit scores.”

Late payments can indeed harm one’s credit score, influencing access to credit and the interest rates paid. When payment due dates accumulate and late payments accumulate, the result can be a mounting debt burden. This is especially concerning given that credit card debt has reached near-record levels, increasing nearly 20% year over year, according to a first-quarter 2023 study by TransUnion.

The CFPB asserts that credit card companies utilize late fees to boost their profits rather than assisting consumers in managing their financial well-being. A 2022 Federal Reserve report indicates that credit card fees, including late fees, contribute to approximately 15% of total credit card profitability. The CFPB’s 2021 Consumer Credit Card Market Report reveals that subprime and deep subprime consumers, comprising only 12% of total accounts, bore 42% of the over $14 billion in late fees paid by consumers in 2019.

While lobbying organizations such as the ABA raise valid concerns about the long-term risks associated with lower late fees for consumers, it is important to recognize their inherent bias. Scott Gilpatric, a behavioral economist at the University of Tennessee specializing in procrastination and self-control, states that “credit card companies aren’t trying to set up a mechanism in the consumer’s interest. They’re trying to maximize their own profits.”

Alternative measures can be employed by consumers to mitigate the impact of late payments, aside from steep late fees. The CFPB suggests that digital notification systems can serve as effective deterrents to motivate late-paying customers, rendering the current policy obsolete. Wei Zhang, deputy assistant director of the CFPB’s Office of Consumer Credit, Payments, and Deposits Markets, highlights that most credit card borrowers are now enrolled in online banking, with nearly two-thirds using mobile apps for their cards.

Additionally, consumers have easy access to their credit scores, allowing them to witness the immediate impact of late payments. Zhang emphasizes that this awareness provides a powerful incentive for timely payments, separate from any late fees incurred.

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However, experts question whether increased notifications and credit score monitoring alone would be sufficient to dissuade late-paying consumers. A 2022 survey commissioned by the ABA revealed that 46% of respondents considered avoiding a late fee the most important reason to pay on time. In the same survey, 83% of participants said that a $10 late fee would not stop them from paying a credit card bill late.

Data from NerdWallet’s Consumer Credit Card Report supports this argument. A March 2023 survey conducted online by The Harris Poll on behalf of NerdWallet found that, on average, an imposed late fee of $30 would prevent Americans from missing a credit card payment.

Gilpatric suggests that while the long-term consequences of late payments, such as a reduced credit score, have a more significant impact on consumers than a $30 late fee, this long-term consequence might not effectively drive short-term consumer behavior. He proposes that deactivating a credit card the moment a payment becomes late would serve as a potent wake-up call to deter late payments.

Regardless of the outcome regarding the future of late fees, consumers can adopt proactive measures to avoid these penalties. Some strategies include setting due date notifications through credit card issuers or personal calendars to avoid late payments, utilizing autopay to ensure timely payments, and requesting a waiver for a late fee, especially if it is the first occurrence.

Source: This article does not directly quote any other article; instead, it draws information from a variety of sources.

Ricardo Anderson
Ricardo Anderson
Ricardo is someone with whom you can ask and talk about finance and its importance in life. A part-time cook, enthusiast, and football player, he loves to read and write on the latest updates in finance.


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