Will Potential New Late Fee Rules Help or Hurt Consumers?

(New York, NY) Credit card late fees have been a hot topic since February when the Consumer Financial Protection Bureau (CFPB) proposed rules aimed at reducing them. The proposal would reduce the cap for late fees to $8 per month (from $41 today), prohibit annual inflation increases on late fee amounts, and ensure that late fees must not exceed 25% of the required payment. Auriemma Group’s latest issue of Cardbeat US uncovered how consumers feel about late fees, the proposed rule changes, and if they would be willing to accept changes to their card products that may occur as a result of the new $8 maximum.

Late fees are top-of-mind for repayment.

Auriemma’s research found that ongoing interest rates (67%) and late fee amounts (62%) are at least somewhat influential when considering how to prioritize paying off credit card balances. However, many cardholders continue to struggle. The CFPB’s biennial report to Congress on the consumer credit card market found that credit card companies charged consumers $25 billion in fees last year, and an additional $105 billion in interest.

“The big question is how to help a struggling population without hindering consumers unaffected by late fees,” says Jonathan O’Connor, Senior Manager of Research at Auriemma. “For now, late fee waivers play a key role in maintaining that balance. While 18% of credit cardholders have been charged at least 1 late fee in the past 12 months, on average, 69% of late fees charged are waived, according to Auriemma’s data.”

And while there are some cardholders that continue to be challenged by late fees, many credit cardholders express positive sentiments about them. Roughly eight-in-ten agree that they encourage timely repayment (83%) and incentivize responsible credit card usage (76%). Still, three-quarters of those who have been charged a late fee say they make it difficult to get out of debt, underscoring the importance of the CFPB’s proposal.

Most believe new late fee rules would have a positive consumer impact.

Awareness of the proposed late fee rule change is limited, but notable. 32% of credit cardholders say they have at least heard of the CFPB’s proposed amendments to Regulation Z, which “implements the Truth in Lending Act (TILA), to better ensure that the late fees charged on credit card accounts are ‘reasonable and proportional’ to the late payment as required under TILA.”

After being provided a description of the proposed rule changes, 67% of cardholders said the CFPB’s proposed late fee rule change would have a positive impact on the average credit cardholder, if enacted. Few (9%) believe the regulation would have a negative impact.

“Those who feel positive tend to believe the changes will make repayment more manageable and provide some needed financial relief,” says O’Connor. “However, detractors worry the change would force issuers to increase interest rates or devalue rewards.”

45% of credit cardholders are unwilling to change their current credit cards’ offerings for an $8 late fee.

Though many respond to the CFPB’s proposed changes positively, if negative alterations need to be enacted to introduce an $8 late fee cap, most would be unlikely to continue using the card. According to Cardbeat US, the most acceptable exchanges, cited by 20% of cardholders, would be to reduce the card’s rewards value or increase the card’s APR by 10%. The least attractive option would be to reduce statement credits or cashback redemption value.

“An $8 late fee cap can help consumers and issuers alike, if rolled out thoughtfully,” says O’Connor. “No cardholder wants to see their card’s value watered down to make room for reduced late fees they may never encounter, but the change could significantly help those in the direst financial straits better manage their repayments.”

If implemented, an industry-wide $8 late fee cap could cause market share shifts based on implementation. Auriemma’s research found that while many cardholders don’t want to relinquish rewards, benefits, or increase annual fees or APR in exchange for lower late fees, issuers able to offer the lower fee without degrading their card’s value too strongly may see a marked impact on acquisition and retention, while also aiding the cardholders in their portfolio who may be struggling.

Survey Methodology

Cardbeat US

This Auriemma Group study was conducted online within the US by an independent field service provider on behalf of Auriemma Group (Auriemma) in September 2023 among 802 adult credit cardholders. The number of interviews completed for both is sufficient to allow for statistical significance testing among sub-groups at the 95% confidence level ±5%, unless otherwise noted. The purpose of the research was not disclosed, nor did respondents know the criteria for qualifying.

About Auriemma Group

For nearly 40 years, Auriemma’s mission has been to empower clients with authoritative data and actionable insights. Our team comprises recognized experts in four primary areas: operational effectiveness, consumer research, co-brand partnerships, and corporate finance. Our business intelligence and advisory services give clients access to the data, expertise and tools they need to navigate an increasingly complex environment and maximize their performance. Auriemma serves the consumer financial services ecosystem from our offices in New York City and London. For more information, call Jonathan O’Connor at (+1) 1-646-437-6116.