Sunday, April 14, 2024

Thought: At last, a much-needed update to the extra charges on credit cards for paying late

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Cookie Monster might not like it when companies make cookies smaller without lowering the price, but he would probably be happy about a new government rule. The Consumer Financial Protection Bureau (CFPB) announced on Tuesday that it’s closing a loophole that costs Americans over $14 billion each year in late fees on their credit cards.

My group, the US Public Interest Research Group (US PIRG), helped create a law called the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). About 15 years ago, I was at the White House when President Barack Obama signed it into law. The goal was to protect people from unfair practices by banks and credit card companies.

One part of the law was supposed to make sure that banks only charge late fees to cover their costs. But in 2010, the Federal Reserve Board, in charge of credit card rules at the time, added a rule that allowed credit card companies to charge up to $25-$35 without explaining why. Over time, these fees increased to $30-$41, even though digital improvements made it cheaper for banks to handle late payments.

The CARD Act says these fees should be reasonable and proportional to the extra work caused by late payments. However, the CFPB found that many companies increased fees every year without proof of higher costs. Now, the CFPB estimates that big credit card companies make five times the processing costs from late fees.

Luckily, the new rule builds on the CFPB’s 13 years of helping consumers. It could save Americans $10 billion per year. The average late fee is currently about $32, but the new rule sets a maximum fee of $8 and stops automatic increases for card issuers with one million or more open accounts.

There’s a loophole: Bigger card issuers that can prove higher collection costs might charge more than $8. The CFPB says the rule encourages credit card companies to benefit more from on-time payments instead of relying on late fees.

The rule was barely out when the US Chamber of Commerce said it would sue the CFPB. But the CFPB has a history of standing up for consumers against powerful business interests.

Credit card companies were caught doing something they shouldn’t. Now, the CFPB is making sure they get what they deserve, and everyday Americans won’t have to pay unfair late fees from Main Street to Sesame Street.

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