Court Ruling Will Reignite Debate Over Credit Card Late Fees

Late last week, a federal judge upheld an order blocking a cap on credit card late fees, as PYMNTS reported. But the debate over the fees — their usefulness, whether they should exist at all — is far from over.

For the moment, though,  the move by the Consumer Financial Protection Bureau (CFPB) to cap those fees, at about $8 through a safe harbor provision, where they’ve most recently been at an industrywide level of about $32, has been stayed by injunction.

In the ruling itself, U.S. District Judge Mark Pittman wrote that “ the CARD Act explicitly allows card issuers to impose ‘penalty fee[s].’” He added that the CFPB’s Final Rule, however, lowered the fees to $8 for card issuers because it would “cover pre-charge-off collection costs for Large Card Issuers on average. … But fees to cover ‘costs’ and fees that constitute ‘penalties’ are not the same thing.”

Matter of Deterrence?

Pittman’s ruling went on to state that “a ‘penalty fee’ implies a purpose of deterrence. … The point is that, under the CARD Act, card issuers have the opportunity to charge penalty fees reasonable and proportional to violations, and narrowing the safe harbor to cost-based fees eliminates that opportunity.”

The ultimate fate and/or reach of the CFPB remains unclear as the new presidential administration takes shape. And at least some card issuers had raised rates in anticipation that if the cap were allowed to be put in place, card firms would see revenue streams tied to those late fees truncated.

Moreover, consumers with overdue payments are often late on more than one — data shows that they are late on 14 payments, on average, across all debt types.

As to the contribution to the card issuers: The Federal Reserve noted, fees, in particular late fees, are tied to about 15% of credit card profitability (the CFPB has estimated that late fees came to $14 billion charged to cardholders in 2022).

Impact of a Cap

In the March 2024 suit that had been filed by the U.S. Chamber of Commerce which sought the injunction, the plaintiffs argued that “late fees encourage timely payments, which in turn help card issuers both to manage credit risk and to lower costs, allowing them to offer more competitive terms and features to broader segments of the population.”

In addition, per the filing, “the Rule may force issuers to raise minimum payments, annual fees, or APRs; lower credit limits; or offer fewer rewards.”  In detailing the value proposition of rewards, PYMNTS Intelligence reported earlier this year that 68% of consumers surveyed said that rewards offerings were “very” or “extremely” important factors that helped drive their card choices.

Capping the fees would have the additional impact, argued the suit, where cardholders “who sometimes pay late may be harmed”  because their credit would be limited by the issuers, as their credit scores decline.