Update: On May 10, a federal judge issued an injunction preventing the late fee cap from taking effect as planned on May 14. The judge cited an ongoing legal challenge to the constitutionality of the CFPB’s funding structure. The Supreme Court is expected to rule on that case in the coming weeks. Depending on that ruling, the late fee cap could be struck down permanently or subject to further legal proceedings. It also remains to be seen whether or not card issuers such as Synchrony and Bread Financial will continue with their efforts, as described below, to raise fees in other areas to compensate for lower late fee revenue now that late fees are not immediately coming down.

The good news: There’s a new rule to cap credit card late fees that’s designed to save credit cardholders money.

The bad news? It probably won’t play out that way. Let me explain.

In March, the Consumer Financial Protection Bureau (CFPB) finalized a rule that will cap credit card late fees at just $8. Previously, the limit was $30 for an initial late payment and $41 for subsequent offenses within six billing cycles. While the much lower cap sounds like a consumer-friendly change, there are signs it won’t play out that way in the real world.

As a senior industry analyst at Bankrate specializing in credit cards, one way I like to think of it is that credit card fees are like whack-a-mole: When one goes down, another is likely to pop up. And as it turns out, we’re already seeing evidence of that — even before the credit card late fee cap officially goes into effect.

Take the example of Synchrony Financial, a prominent issuer of retail credit cards, which tend to be easier to get than other types of credit cards. Because its clientele skews lower-income and less creditworthy, late fees and interest charges are a much bigger part of Synchrony’s business model than upmarket competitors such as American Express, which courts affluent, heavy spenders with travel rewards and other perks.

In fact, late fees make up about 16 percent of Synchrony’s revenues — almost double the average of the five largest card issuers — a Goldman Sachs analyst told Payments Dive. Overall, late fees account for 40 percent of Synchrony’s earnings.

When late fees go down, other fees go up

In direct response to the CFPB’s late fee cap, Synchrony has publicly stated plans to raise some of its cards’ interest rates and add a $1.99 monthly fee for receiving paper statements. American Banker reports that the Synchrony T.J. Maxx credit card will soon charge an annual percentage rate of 34.99 percent, up from 32.24 percent (the average credit card rate is currently 20.66 percent).

Further, the T.J. Maxx card’s penalty APR, which kicks in after a customer falls 60 or more days late, will increase to a whopping 39.99 percent (it’s 29.99 percent on most cards). It also sounds as if Synchrony will make similar moves on many of its other cards.

The company’s president and chief executive officer, Brian Doubles, defended the changes on Synchrony’s April 24 earnings call. “We’re executing our plan. We said from the beginning that we weren’t going to wait for the outcome on litigation, just given the uncertainty,” he said. “So we began the implementation of our changes in December. We’re already over 60 percent done with those. We’ve got to send out the changes in terms, etc. The vast majority of those will be done in the next two months.”

How the courts could still overturn the late fee cap

The litigation Doubles referred to is an effort, led by the U.S. Chamber of Commerce and joined by many banks and financial industry associations, to overturn the CFPB’s late fee cap in the courts. Plaintiffs filed their lawsuit in a federal judicial district in Texas known to be friendly to industry groups and hostile to the Biden Administration.

Judge Mark Pittman transferred the case to Washington, D.C., where the CFPB is based, and accused the plaintiffs of “venue shopping,” according to the Associated Press. But the D.C. court failed to hear the case, opening the door for it to move back to Texas or another location where a conservative, bank-friendly judge could issue an injunction to prevent the late fee cap from taking effect on May 14. In fact, an emergency stay which would delay the late fee cap is the most likely outcome, American Banker reports.

Why consumers could lose either way

While there’s still a lot of uncertainty regarding the path forward, I fear consumers could end up losing either way. I actually think the current system — which comes with higher late fees, but fewer additional fees — could be better for a wider group of Americans.

The CFPB says 45 million Americans are assessed late fees in a typical year, and the agency estimates that they will save $220 annually when the cap falls to $8 from a previous average of $32. But when you do the math, you realize this is based upon an estimate that these people are paying late nearly 10 times each year. Only a third of credit cardholders paid late in 2020, the last time Bankrate conducted a survey on this topic.

I don’t mean to be flippant, but the best way to avoid late fees is to pay on time. Unintended consequences of the CFPB’s late fee cap could include higher fees in other areas — something we’re already seeing — and perhaps reduced access to credit, if certain segments of the population become less profitable for issuers.

Bread Financial is another card issuer that focuses on the retail credit cards space, which could be impacted by the late fee cap even more severely than Synchrony, according to the aforementioned Goldman Sachs analyst. Here’s what Bread Financial CEO Ralph Andretta said about the late fee cap during his company’s latest earnings call:

“Not only will a lower late fee serve far less as a deterrent or penalty for consumers paying late, meaning more customers will pay late and therefore impacting their credit scores. The CFPB late fee rule change will also ultimately result in consumers paying more for credit through higher APRs and additional fees, and in some cases, consumers losing access to credit.”

Late fees are probably too high

The banks aren’t totally innocent in this, of course. The CFPB’s $8 late fee cap isn’t a hard cap, but rather, it’s a “safe harbor” threshold. As in, card issuers can charge late fees higher than $8 if they can show the CFPB the math and prove that these late payments cost them more than $8 apiece. The CFPB’s implication — more like a dare, really — is that they don’t think the banks can prove that.

President Biden and CFPB Director Rohit Chopra are waging a war on “junk fees” they view as disproportionate to the value received, including credit card late fees, airline seat selection fees, concert ticket processing fees and so forth. They assert that these fees have become profit centers rather than cost offsets. And that’s probably true, since no card issuers have come forward with calculations showing late payments cost them more than $8 apiece.

The bottom line

We’ve seen this movie before, unfortunately. In 2010, Senator Dick Durbin pushed through the “Durbin Amendment” to the Dodd-Frank Act, thereby capping debit card interchange fees. But merchants pocketed the savings (a mere 1 percent lowered prices, according to the Federal Reserve Bank of Richmond), and consumers endured higher overdraft fees, reduced access to free checking accounts and cutbacks in debit card rewards programs.

Durbin and several colleagues are currently pushing similar legislation known as the Credit Card Competition Act. In my view, it’s a wolf in sheep’s clothing. Sure, it sounds friendly, but if it passes, potential ramifications could include lower credit card rewards, reduced data security and diminished access to credit.

Remember: when one fee goes down, another goes up. Efforts to cap credit card fees, while well-intentioned, are likely to do more harm than good because more people will face higher interest rates and higher fees in other areas.

Unfortunately, even if the late fee cap is stayed by a federal judge, the damage has already been done. Issuers are already taking steps to raise revenue in other areas and may not unwind those efforts even if the late fee cap is struck down or delayed, leaving consumers worse off regardless of how legislative action plays out.
Have a question about credit cards? E-mail me at ted.rossman@bankrate.com and I’d be happy to help.