Missed a Credit Card Payment? Your Late Fee Could Be Slashed to $8

The federal government has proposed a rule that would limit the fees that credit card holders owe when they are late paying a monthly bill to $8.

Late fees cost American cardholders about $12 billion each year, according to the Consumer Financial Protection Bureau, which is proposing the rule. The agency estimates that the rule change would save people as much as $9 billion annually.

This is not the first time the government has tried to curb credit card late fees. The Credit CARD Act of 2009 banned excessive late fees, but an immunity provision has allowed lenders to circumvent the rule.

In a statement posted on the CFPB website, the agency’s director, Rohit Chopra, says: “Over a decade ago, Congress banned excessive credit card late fees, but companies have exploited a regulatory loophole that has allowed them to escape scrutiny for charging an otherwise illegal junk fee.” This proposal “seeks to save families billions of dollars and ensure the credit card market is fair and competitive.”

The proposed rule would limit credit card late fees to $8, but companies could charge more if they prove that higher fees are required for collection costs.

Still, the CFPB says the $8 limit would be “sufficient for most issuers to cover collection costs incurred as a result of late payments.” It estimates that income generated by the largest issuers from late fees is about five times greater than collection costs. Companies currently charge as much as $41 for each missed payment.

Other proposed rule changes would end a built-in inflation adjustment and restrict any late fee to 25% of the required minimum payment rather than the 100% now permitted. The CFPB would adjust the late fee amount as needed based on market conditions.

Some critics of the proposed CFPB rule argue that it could limit access to credit for some borrowers or make credit more expensive.

The American Bankers Association issued a statement in which Rob Nichols, president and CEO, calls the proposal “extreme” and says it would both reduce competition and increase the cost of credit.

“It will result in more late payments, higher debt and lower credit scores, and is inconsistent with the CARD Act’s encouragement of responsible credit management,” Nichols says in the statement.

He says credit card issuers will have no choice but to try to reduce their risk by:

John Ulzheimer, a credit expert who has worked at Equifax and FICO, says he sympathizes with the CFPB’s aims.

“I understand what the CFPB is trying to do,” Ulzheimer says. “They are trying to protect the most at-risk (borrowers) from these fees, which is a noble cause.”

However, Ulzheimer says he fears that the critics could be right. “These punitive fees serve a purpose, which is to subsidize the added work to chase down payments from people who won’t make them in a timely manner,” he says.

If fees are capped, card issuers “are simply going to figure out somewhere else” to get more money from cardholders to pay those costs, Ulzheimer says. “That means higher fees elsewhere,” he adds.

Issuers could also respond by looking at problematic accounts and deciding that “they’re better off closing the cards from underneath the cardholder,” Ulzheimer says.

Like Ulzheimer, Todd Christensen, education manager at Debt Reduction Services and accredited financial counselor, lauds the CFPB’s intentions but says he has misgivings about the proposal. It might encourage bad behavior from cardholders, he says.

“If a consumer knows that the late fee is just $8 and that the credit card company can’t report them late until they are at least 30 days late, there’s not a whole lot of incentive to make payments on time and as agreed,” Christensen says.

If late fees drop to $8, Christensen says he expects many credit card companies to raise interest rates “if that remains their only effective recourse for countering late payments.”

The best way to avoid late credit card payments is to use your plastic responsibly, Christensen says. Ultimately, the power to avoid late fees, however much they might cost, is in your hands.

“Many credit card holders need a change of perspective,” Christensen says. “Too many consumers think of their credit cards as an emergency backup option for financial challenges.”

Instead, Christensen says credit cards should be used for two reasons only: convenience and security. He adds that saving money in a bank or credit union is a better emergency backup option.

If you slip up and miss a payment, you may be able to appeal a late fee, but you can also take steps to prevent yourself from falling behind, such as:

Asking your credit card company to change the payment due date. For example, you might better remember to pay your bill if it is always due on the first of the month.

Setting up automated payments. Credit card companies generally will allow you to schedule payments directly and automatically from a bank account each month. Typically, you can request to cover the minimum amount due or the entire balance.

“The key to success is making sure that sufficient funds are in your account on the scheduled withdrawal date,” says Bruce McClary, senior vice president of membership and communications for the National Foundation for Credit Counseling. “This means reviewing your credit card and bank account statements.”

Using payment reminders. You might be able to set up email or text notifications from your credit card company as a reminder before your payment is due.

“Almost all card issuers allow you to set a multitude of reminders during the statement cycle,” Ulzheimer says. “So there’s really no reason to not know your statement has been cut and your due date is upcoming.”

If you think that a payment might be late, contact your credit card company promptly.

“Don’t wait until you miss a payment before reaching out to your credit card issuer for help,” McClary says. “In many cases, there may be ways to help avoid late fees and other penalties before trouble happens.”

If your payment is late and you owe a fee, you can ask the card issuer to waive it. The issuer may be more likely to forgive your fee if you have a good payment history.

Often, late fees are nonnegotiable, McClary says. However, you can still try to see if your lender will make an exception.

“It wouldn’t hurt to see if your creditor might make a special accommodation if you are experiencing a temporary financial hardship, or if there are other extenuating circumstances,” he says.

Even if you are successful with a waiver, you can expect limits to the mercy your issuer will show you.

“You can certainly talk your way out of a late fee by simply asking,” Ulzheimer says. “But you can’t do that month after month.”

If you are regularly falling behind on your payments, reach out for help. A debt management plan, for example, “can help bring past-due accounts current and end the recurring pattern of late fees,” McClary says.

Whatever course of action you decide on, try not to delay in paying your debt, says Alli Wetzeler, a certified personal finance counselor with Consumer Credit of Des Moines in Iowa.

“Try to make that minimum payment as soon as you can,” Wetzeler says. “The later you are in the credit card payment, the more impact that has on your credit.”