The CFPB’s new rules close loopholes that allow banks to charge exorbitant late fees. (iStock)
The Consumer Financial Protection Bureau (CFPB) is finalizing rules that will limit the amount of late fees consumers can be charged.
The rule limits late fees to 25% of the required payment and ends automatic inflation adjustments to these fees, according to the regulations. CFPB. Credit card companies can still charge late fees, but under the new rules they must prove that the fees match the cost of collection.
This measure would reduce late fees in most cases from an average of $32 to $8, an average savings of $220 per year for the more than 45 million people who are charged late fees. This change could save families $10 billion each year.
Congress first banned exorbitant late fees in 2009 under the CARD Act. But the Federal Reserve, which is responsible for enforcing the law, added a disclaimer that created a regulatory loophole that companies used to avoid scrutiny for charging these late fees, according to the CFPB. .
“For more than a decade, the credit card giants have exploited loopholes to collect billions of dollars in junk fees from American consumers,” CFPB Director Rohit Chopra said in a statement. “Today’s rules end the days when major credit card companies used inflation as an excuse to hide behind raising fees for borrowers and boosting their own profits.
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Existing credit card users will be penalized
Changes to late fees could also have the unintended consequence of penalizing existing credit card customers who pay their bills on time, according to the Consumer Bankers Association (CBA).
Most Americans who don’t make late payments won’t see any cost savings, and card issuers could bear the brunt of increased costs from having to collect that money in other ways.
“This final rule increases the cost of late payments by increasing the cost among the 74% of cardholders who pay their bills on time,” said Lindsey Johnson, CBA President and CEO. “This will offset this and benefit the small number of people who frequently default on their payments.” statement. “The CFPB openly acknowledges that the vast majority of cardholders are likely to see their credit card interest rates rise and their credit scores deteriorate.
“This will be particularly impactful for the approximately 50% of subprime card consumers who work hard and budget to pay their bills on time, and who will now have access to credit and debt obligations.” It will become more difficult to manage your credit history and build your credit history,” Johnson continued. .
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Late credit card payments can negatively impact your credit score
Another concern is that the rule could make late credit card payments more common, which could affect consumers’ credit scores in the long run.
TransUnion recently reported that credit card balances will reach a new benchmark in the fourth quarter of 2023, surpassing the $1 trillion mark for the first time. report. Outstandings grew 13% year over year across all risk tiers, led by subprime, which rose 32% to $105 billion. Even though interest rates skyrocketed, the average balance increased to $6,360.
Lower late fees could cause overstretched consumers to miss their monthly payments, jeopardizing their financial health, said Jim Nassle, president and CEO of American Credit Unions. It is said that there is a sex.
“The CFPB’s erroneous final rule on credit card late fees clearly demonstrates a misunderstanding of how credit cards work, trapping millions of consumers into a cycle of debt instead of serving their intended protection. “It’s possible,” Nussul said. “Credit unions are working to strengthen financial decision-making for our members and clearly define late fees. An $8 late fee is roughly equivalent to the price of a Big Mac and a large Coke. However, it does nothing to protect publishers and consumer accountability is thrown to the side.”
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