Credit Card Late Fees to Rise in 2020
The CFPB has indicated that the maximum credit card late fee will increase for the second time in a row.
No one is perfect. Sometimes we simply forget to pay our bills, and sometimes they’re late through no fault of our own. But if you were to pay your credit card payment late this year, you may have to pay a higher fee.
As of January 1, the Consumer Financial Protection Bureau (CFPB) has raised its maximum allowed late fee by $1. For first-time late fees, the maximum penalty was raised from $28 to $29. For subsequent late fees in a six-month period, the penalty is now $40 from $39.
This is the third time the CFPB raised the maximum amount in five years and the first time there were back-to-back raises. Each time the CFPB raised the maximum fees, it has been by $1.
The CFPB is empowered to make these fee changes through the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (“the Card Act”), which chained the maximum late fee to a consumer price index. If the consumer price index changes significantly, so does the maximum late fee.
While a $1 increase may not seem significant at first glance, it can add up quickly. “It’s the late fee itself, not the $1 increase that consumers should be concerned about,” Simon Nowak, CEO of the credit score delivery service 3CreditScores.net, told Finder. “A late fee of $39 has virtually the same impact on a monthly budget as a $40 late fee.”
The $1 increase does not mean that credit card companies have to increase their late fees. The law mandates that late fees are reasonable and proportional. In 2019, when the first-time rate climbed from $27 to $28, many credit card companies opted to ignore the hike. Some banks have their own metrics for determining what is a fair late fee independent of the law.
Some, however, opted to take advantage of the law, as it is an easy way to stay in compliance. “With thousands or millions of cardholders paying an extra $1 each month, that’s enough to move the needle,” Nowak added.
As of the writing of this article, Citi is the only bank that has raised its late fees. The act requires the card company to give a minimum of 45-days notice to cardholders before the new fees take place.
Typically, however, the late fee is the least of one’s problems should one make a late payment. Many cards will raise your card’s APR — usually around 30% — for new purchases if you are a habitually late payer. This is rare, however, because of protections granted by the Card Act. Payments 30 days past due or older can also be reported to the credit bureaus, which may lower your credit scores.
One way to avoid these charges is to practice sound financial hygiene. “Consumers should still treat credit card late fees the same: avoid them,” Charles Thomas, a certified financial planner and the founder of the faith-oriented financial advisory firm Intrepid Eagle Finance, told Finder.
“Card issuers will likely raise their fees in lockstep, but consumers can avoid this the same as they always have by using credit only when they can pay the full balance on time each month.”
Another option is to opt for a card that does not charge late fees. These cards typically trade-off the late fees by charging higher APRs, which would have a similar effect on carried balances. Among the cards currently available that charges no late fees are the Citi Simplicity Card, Petal Visa Credit Card, and the PenFed Promise Visa Card.