CFPB Finds Credit Card Late Fees Fell Slightly in 2020

Federal pandemic relief checks allowed households to incur few late fees on their credit cards in 2020 and early 2021, according to a CFPB report released Tuesday.

The CFPB’s 17-page report found credit card late fees in 2020 were $12 billion, accounting for 10% of the $117 billion in fees and interest paid by households that year.

The fee percentage is down slightly from 11% in 2018 and 2019. In 2018, late fees were $13 billion out of $119 billion in fees and interest, and in 2019 late fees were $14 billion out of $128 billion in fees and interest.

The study also compared maximum late fees charged by the Top 20 issuers, all of them banks, with other banks and credit unions.

Among nearly 400 credit union issuers, about three quarters of them charged $25 or less for an initial monthly late fee in the fourth quarter of 2020, with half of the credit unions charging $21 to $25.

The Top 20 charged $36 to $40 — near the legal maximums. More than half of banks outside the Top 20 charged $26 or more.

“Many credit card issuers have made late fee penalties a core part of their profit model,” CFPB Director Rohit Chopra said in a CFPB news release.

“Markets work best when companies compete on price and service, rather than relying on back-end fees that obscure the true cost.” he said. “Given their current practices, we expect that credit card issuers will hike fees, based on inflation, as limits continue to rise.”

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) created a range of protections for cardholders, including limiting how much credit card companies could charge for penalties such as over-the-limit fees and late fees, as well as limits on interest rate increases.

The CFPB said many of these protections have been effective in reducing the total cost of credit for consumers, improving competition and creating transparency on pricing. Nevertheless, it said its report showed late fees continue to burden millions of families.

The CFPB found late fee volume fell when pandemic relief checks arrived in 2020 and 2021, particularly for households with lower credit scores. Other evidence has shown that stimulus checks improved household balances and liquidity.

“The fact that late fee charges for credit card issuers fell during the same period suggests that late fees are a penalty on households living paycheck-to-paycheck rather than a meaningful incentive to make on-time payments,” the CFPB said.

The CFPB also found that low-income areas, areas with high shares of Black Americans and areas with lower economic mobility all bear more of the late fee burden.

In 2019, credit card accounts held by cardholders living in the United States’ poorest neighborhoods paid twice as much on average in total late fees than those in the richest areas.

Cardholders in majority-Black areas paid more in late fees for each card they held with major credit card issuers in 2019 than majority white areas.

And people in areas with the lowest rates of economic mobility paid nearly $10 more in late fee charges per account compared to people in areas with the highest rates of economic mobility.

In 2010, the Federal Reserve Board of Governors voted to implement provisions of the CARD Act that required penalties to be “reasonable and proportional.” In its rule the Federal Reserve Board included an immunity provision that allowed credit card issuers to set fees at a particular level, subject to an annual inflation adjustment. Today, these limits have climbed to $30 for the first late payment and $41 for a subsequent late payment within six billing cycles.

Congress removed the authority of the Federal Reserve Board of Governors to adjust these provisions and transferred them to the CFPB. The CFPB said it expects many major card issuers to hike fees further, based on inflation, given the existing reliance on the immunity provisions in the marketplace.

Chopra met March 24 with leaders of the California and Nevada Credit Union Leagues and 75 credit union CEOs from the states.

Credit card late fees was one of many issues Chopra discussed. He said the bureau’s current priorities include increasing competition across financial services and dealing with repeat offenders that routinely violate orders.

Other issues he discussed included:

• Auto repossessions: As used car prices rise, so does the risk for financial entities to illegally repossess vehicles from consumers by not using appropriate documentation.
• Credit reporting: The bureau wants to make sure there is reasonable accuracy in credit reporting within the myriad of “back and forth” between creditors, credit bureaus, hospitals and health insurance companies due to consumer complaints of material errors on reports.
• Fees: The bureau is concerned many consumers are surprised or caught off guard by certain fees, and it wants to foster a more transparent environment with respect to up-front fee disclosures and the “why” behind fees.
• Credit unions, banks, fintechs and others: The bureau will lean more of its focus on non-depository institutions (third-party financial companies, BNPLs, fintechs and others) versus depository institutions (credit unions and banks) since it’s easier for the former to exploit consumers through financial and/or regulatory arbitrage.