The Consumer Financial Protection Bureau, the federal agency responsible for protecting consumers in the financial industry, recently proposed a rule to cap credit card late fees to $8 or 25% of the minimum missed credit card payment — whichever is lower.
Today, credit card issuers (primarily banks) charge cardholders up to $30 for an initial late payment, $41 for subsequent missed payments, and up to 100% of the minimum payment as a late fee. In 2020 alone, these late fees provided credit card companies $12 billion in revenue. The proposed CFPB rule will reduce these profits by 72%.
This appears to be a win for Main Street and a loss to Wall Street — more money in borrowers’ pockets and less for billion-dollar firms.
But not so fast. Credit card companies won’t eat this revenue loss. Instead, they will make up the money elsewhere — namely, by extending less credit to borrowers with low credit scores and providing fewer credit card rewards.
As the Consumer Bankers Association notes, credit card late fees are necessary for doing business for banks. These fees are used by banks to provide the product but also to help in monitoring credit risk. For borrowers that miss payments, the extension of credit becomes riskier in the future. Banks that priced in this risk with late fees under the proposal would have a cap of $8 — which may be too low for the risk of extending credit to some borrowers.
To counter the losses they incur from the CFPB’s late-fee price cap, banks will have no choice but to provide fewer extensions of credit, raise the annual percentage rate or enforce higher minimum credit scores for future borrowers. That may force borrowers to seek credit in less regulated channels. These channels, such as predatory payday loans or buy-now, pay-later platforms, often have higher interest rates.
In other words, the proposed rule will hurt the same borrowers it’s intended to help.
Even the CFPB acknowledges that all credit card users will face negative consequences from this rule as banks will have no choice but to increase maintenance fees and reduce rewards points. This is problematic as 50% of American adults surveyed in a study use a credit card solely to rack up reward points. Without ample reward programs and point accumulation, credit card borrowing will decline significantly.
Economic research also shows that reducing late fees will raise the likelihood of borrowers paying late. That’s bad news because missing payments can have far more adverse effects on borrowers than added fees, including reduced credit lines and higher interest rates. It also negatively affects a consumer’s credit score by as much as 100 points and could stay on the consumer’s credit report for several years, affecting their ability to qualify for future loans.
Capping late fees won’t help Americans. It will shrink access to credit for borrowers that need it the most, hurt consumer credit scores and decimate credit card reward programs. All are far worse than the temporary gain of lower late fee payments.
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The Consumer Financial Protection Bureau, the federal agency responsible for protecting consumers in the financial industry, recently proposed a rule to cap credit card late fees to $8 or 25% of the minimum missed credit card payment — whichever is lower.
Today, credit card issuers (primarily banks) charge cardholders up to $30 for an initial late payment, $41 for subsequent missed payments, and up to 100% of the minimum payment as a late fee. In 2020 alone, these late fees provided credit card companies $12 billion in revenue. The proposed CFPB rule will reduce these profits by 72%.
This appears to be a win for Main Street and a loss to Wall Street — more money in borrowers’ pockets and less for billion-dollar firms.
But not so fast. Credit card companies won’t eat this revenue loss. Instead, they will make up the money elsewhere — namely, by extending less credit to borrowers with low credit scores and providing fewer credit card rewards.
As the Consumer Bankers Association notes, credit card late fees are necessary for doing business for banks. These fees are used by banks to provide the product but also to help in monitoring credit risk. For borrowers that miss payments, the extension of credit becomes riskier in the future. Banks that priced in this risk with late fees under the proposal would have a cap of $8 — which may be too low for the risk of extending credit to some borrowers.
To counter the losses they incur from the CFPB’s late-fee price cap, banks will have no choice but to provide fewer extensions of credit, raise the annual percentage rate or enforce higher minimum credit scores for future borrowers. That may force borrowers to seek credit in less regulated channels. These channels, such as predatory payday loans or buy-now, pay-later platforms, often have higher interest rates.
In other words, the proposed rule will hurt the same borrowers it’s intended to help.
Even the CFPB acknowledges that all credit card users will face negative consequences from this rule as banks will have no choice but to increase maintenance fees and reduce rewards points. This is problematic as 50% of American adults surveyed in a study use a credit card solely to rack up reward points. Without ample reward programs and point accumulation, credit card borrowing will decline significantly.
Economic research also shows that reducing late fees will raise the likelihood of borrowers paying late. That’s bad news because missing payments can have far more adverse effects on borrowers than added fees, including reduced credit lines and higher interest rates. It also negatively affects a consumer’s credit score by as much as 100 points and could stay on the consumer’s credit report for several years, affecting their ability to qualify for future loans.
Capping late fees won’t help Americans. It will shrink access to credit for borrowers that need it the most, hurt consumer credit scores and decimate credit card reward programs. All are far worse than the temporary gain of lower late fee payments.
READ ORIGINAL ARTICLE