Do High Credit Card Late Fees Harm — or Protect — Consumers?

Update: On March 7, 2023, the U.S. Chamber of Commerce filed a lawsuit against the Consumer Financial Protection Bureau’s new rule against credit card late fees. The suit argues that the CFPB’s rule violates the CARD Act of 2009 by preventing credit card companies from “collecting reasonable and proportional late fees when cardholders don’t pay their bills on time.” On a call announcing the rule, CFPB Director Rohit Chopra said the bureau’s research shows that issuers’ late fee revenue is “more than five times the companies’ associated costs.”

In a time when inflation is driving up the cost of nearly everything you buy, something else has increased, too: credit card late fees. Thanks to a clause in the 2009 Credit Card Act, credit card issuers can raise late fees, and over time those fees have risen to current maximums of up to $41.

The Consumer Financial Protection Bureau recently instituted a rule that will slash credit card late fee maximums by 75%, to $8 per late payment. While lower fees may seem like a good thing for the consumer, some argue that paying less could do more harm than good. According to the American Banking Association, such a reduction “will result in more late payments, higher debt and lower credit scores.”

Habitual late payments can indeed damage your credit score, which impacts access to credit and how much you’ll pay in interest. And as payment due dates pile up, late payments can lead to an escalation of debt. That escalation is especially concerning when, according to a first-quarter 2023 study by TransUnion, credit card debt is at near-record levels, rising nearly 20% year over year.

Late fees: Deterrent or profit source?

The CFPB moved forward with its new rule because it claims that credit card companies are using late fees to pad their bottom lines, not to help people manage their financial health. A 2022 Federal Reserve report shows that credit card fees — including late fees in particular — account for about 15% of total credit card profitability. And according to the CFPB’s 2021 Consumer Credit Card Market Report, that cost is borne most by the customers who can least afford it. The report shows that of the over $14 billion in late fees paid by consumers in 2019, subprime and deep subprime consumers paid 42% of that total while representing just 12% of total accounts.

While lobbying organizations like the ABA may have a valid point about the long-term dangers of lower late fees for consumers, it’s important to remember their bias. As Scott Gilpatric, a behavioral economist at the University of Tennessee who specializes in procrastination and self-control, puts it, “credit card companies aren't trying to set up a mechanism in the consumer's interest. They're trying to maximize their own profits.”

Consumers can employ alternative guardrails

Steep late fees aren’t the only way to help lessen the damage of late payments. The CFPB argues that new digital notification deterrents can motivate late-paying customers in lieu of high fees.

According to Wei Zhang, deputy assistant director of the CFPB’s Office of Consumer Credit, Payments, and Deposits Markets, “These days the vast majority of credit card borrowers are enrolled in online banking, and nearly two-thirds use a mobile app for their card.”

Consumers also have ready access to their credit scores, so they witness the impact of late payments in nearly real time. “That’s a powerful incentive to get their payment in before the next due date,” Zhang says, “separate and distinct from any late fee they’ve been charged.”

Do longer-term consequences change consumer behavior?

While increased notifications and credit score monitoring may be useful, experts question whether these alone would be sufficient to dissuade late-paying consumers. A 2022 ABA-commissioned survey showed that 46% of respondents said avoiding a late fee was the most important reason to pay on time. In that same survey, 83% of respondents said that a $10 late fee would be insufficient to deter them from paying a credit card bill late. Data from NerdWallet’s latest Consumer Credit Card Report seems to support this argument. In a March 2023 survey conducted online by The Harris Poll on behalf of NerdWallet, Americans who would miss a credit card payment say that a late fee of $30, on average, would prevent them from ever missing a payment.

Gilpatric notes that while the effects of paying late such as a reduction in credit score are ultimately more impactful for the consumer than a $30 late fee, that long-term consequence isn’t necessarily effective at driving short-term consumer behavior.

If issuers truly wanted to deter late payments, Gilpatric argues, there are stronger mechanisms available. “If the moment you are late on a payment your credit card becomes deactivated,” he argues, “that would be a big wake-up call.”

How to avoid credit card late fees

Even though late fees will fall under the CFPB's ruling, you can take proactive measures to avoid these penalties entirely:

Due date notifications

Whether through the credit card issuer if it offers this feature or by using your personal calendar, setting reminders of your upcoming due date will help you avoid late payments.

Use autopay

Enabling automatic payment will guarantee that you never again face a late fee. If you’re not sure that you can pay in full each time, set your autopay to cover the minimum payment due, then pay the balance of your bill separately as your budget allows.

Request a late fee waiver

If you’ve been hit with a late fee from an issuer for the first time, it’s worth asking to have the late fee waived. Some issuers will grant this upon request.