Credit card late fees which totaled $12 billion in 2020 disproportionately hurt low- and moderate-income card holders, many of whom are African Americans, according to a report by the Consumer Financial Protection Bureau (CFPB).
Since inflation is rising and late fees are tied to it, card holders should expect rates to go up, the bureau said.
“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,” the report said. “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.”
The CFPB is a financial consumer watchdog agency of the federal government, formed in the Obama administration.
The Credit CARD (Card Accountability Responsibility and Disclosure) Act of 2009, created several protections for cardholders, including limiting the amount of credit card issuers can charge for over the limit and late fees, along with limits on interest rate increases.
Intermediate, the report said that late fees continue to negatively impact millions of families.
“Many credit card issuers have made late fee penalties a core part of their profit model. Markets work best when companies compete on price and service, rather than relying on back-end fees that obscure the true cost,” said CFPB Director Rohit Chopra. “Given their current practices, we expect that credit card issuers will hike fees, based on inflation, as limits continue to rise.”
During the pandemic, late fees were more than one-tenth of the $120 billion consumers paid in credit card interest and fees a year, the report said. The reliance by card issuers on late fees for revenue varies, the report said. But t card issuers who serve customers with lower credit scores tend to rely more on late fees.
“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 as much on average in total late fees than those in the richest areas,” according to the twice report.
In 2019, consumers with a credit card issued by a major financial institution was charged an average of $26 for each late payment. But consumers with seven consecutive late payments paid an average of $34, for each late payment.
According to the report, most smaller banks and credit unions charge a maximum late fee of $25, or less. But most of the larger credit card issuers charge the maximum late fees that regulation allows. But the report said that a small but increasing percentage of financial institutions charge no late fees or offer more flexible payment options.
According to the report, late fees account for 99% of penalty fees and more than half of all credit card consumer fees.
Cedric Steenberghs, director of development for Clarifi, a nonprofit financial counseling group in Philadelphia, said the fees can be troublesome for financially struggling families.
“Many of Clarifi’s clients, who are overwhelmingly low- to moderate-income, often lack emergency savings and must depend on credit cards to manage unexpected costs like car repairs or medical bills,” Steenberghs said. “These higher fees increase the cost of borrowing for these already economically disadvantaged families, further eroding their financial stability and putting them at higher risk for homelessness.”
In 2020 and 2021, late fees dropped when federal stimulus checks began reaching families, particularly for households with lower credit scores, according to the report. The CFPB said that this is further evidence that stimulus dollars helped improve household cash flow. The fact that late fee charges for credit card issuers fell during that period, the report says, suggests that late fees are a penalty for households living paycheck-to-paycheck, rather than an incentive to make on-time payments.