Credit Card Lenders Are Getting Rich Off Your Late Fees
A new rule from the Consumer Financial Protection Bureau is banning excessive credit card late fees. In retaliation, the greedy banking industry is threatening to punish debtors by increasing already exorbitant interest rates.
Capital One and Discover are on the brink of a merger. (Angus Mordant / Bloomberg via Getty Images)
Over the last decade, credit card companies have jacked up interest rates to a record high, costing Americans $25 billion each year, even though regulators say lenders’ risk of losses has declined. Now, in response to a new ban on excessive credit card late fees, the banking industry is threatening to punish debtors with even higher interest rates as lenders’ profits skyrocket.
In response to new late-fee caps announced on Tuesday, the banking industry’s largest trade group is arguing that consumer penalties and sky-high interest rates account for the risk of people failing to pay their credit card bills. But as a recent federal report showed, credit card companies have nearly doubled the interest rates they charge to consumers — far outpacing the financial risk they’re taking on by lending people money.
This means that corporate greed, not financial hazards, is behind the soaring credit card fees that cardholders face. Total US credit card debt has reached a new high of $1.13 trillion — and as big credit card companies work to consolidate their market power, experts say the problem will likely get worse.
Last year, lenders reaped an extra $25 billion of revenue from charging the highest average credit card interest rates ever recorded, according to data from the Consumer Financial Protection Bureau (CFPB), the federal consumer watchdog agency. That extra revenue cost the average indebted cardholder $250 annually.
The CFPB has been cracking down on higher fees and excess rates, and on Tuesday announced that banks can’t charge more in late fees than they lose on such transactions. The new rule caps credit card late fees at $8 per month in most cases — down from an average of $32.
Credit card companies say such fees aren’t just meant to cover their costs of late payments, but also reflect the risk in lending money to consumers. As more people default on their credit card debt, the company takes on more responsibility. In a statement following the CFPB’s Tuesday announcement, the American Bankers Association, a trade group representing the banking industry, threatened to raise interest rates even higher as a result of the new rule.
“The Bureau’s misguided decision to cap credit card late fees at a level far below banks’ actual costs will force card issuers to reduce credit lines, tighten standards for new accounts and raise annual percentage rates (APRs) for all consumers — even those who pay on time,” the group wrote, echoing similar threats made in a November letter to the CFPB in response to its initial late-fee proposal.
Yet the rising rates come despite the fact that cardholders are no more likely to miss credit card payments today than they were a decade ago, and despite average credit scores rising consistently over the same time period — metrics that should indicate lower risk of cardholder defaults, when consumers fail to pay their credit card minimums.
Critics argue that as a handful of companies now control most of America’s credit card transactions, lenders are able to use their outsize market power to increase rates far above the underlying interest rate the Federal Reserve sets for credit cards without fear of price competition. And they say the situation will worsen if regulators approve a proposed merger between Capital One and Discover.
“Everything the [CFPB] is identifying in its research, what we’re seeing with the choices consumers are making about credit cards — it all points to a market that doesn’t seem to be working the way it’s supposed to,” said Adam Rust, the director of financial services at the consumer advocacy group Consumer Federation of America. Rust added that the new data indicates that the system is “tilting in favor of the big banks and against regular households.”
On February 22, the CFPB released a report on the massive spike in credit card interest rates over the past decade, finding that the average credit card APR — the cost of carrying a credit card balance — had reached “the highest level recorded since the Federal Reserve began collecting this data in 1994.”
In 2013, the average APR was 12.9 percent. By 2023, that rate had ballooned to 22.8 percent, federal regulators found, representing a serious increase in costs for consumers — nearly half of whom have credit card debt, a record high. A consumer carrying the average card balance of $6,501, for instance, would pay $123 in interest for the month.
PQL Credit card interest fees are increasingly profitable for big credit card companies, and increasingly punitive for consumers.
Credit card interest rates are expected to track with the benchmark interest rate set by the Federal Reserve. But federal regulators found in the report that higher Fed rates in 2022 and 2023 (3 percent in fall 2022 and 5.3 percent by the end of 2023) did not fully account for how quickly credit card companies’ average APR was rising. The so-called “APR margin” — the difference between the prime rate and average interest rates charged by credit card companies — has increased steadily over the last decade, from 9.6 percent in 2013 to a peak of 14.3 percent last year.
In short, that means credit card interest fees are increasingly profitable for big credit card companies, and increasingly punitive for consumers.
“It means people have less money for groceries, less money for gas, less money for rent,” Rust said. As interest rates continue to rise, consumers, he said, will be increasingly “maxed out on cards and paying a significant portion of their income straight to cover the cost of that debt.”
“Massive Antitrust Concerns”
CFPB data show that thirty large lenders now control roughly 95 percent of the consumer credit card market. In the agency’s new report, federal regulators in part blamed sky-high interest rates on the large market share captured by big credit card and banking companies like Chase, Capital One, and American Express.
“While the top credit card companies dominate the market, smaller issuers many times offer credit cards with significantly lower APRs,” officials wrote. They noted that thanks to deceptive marketing practices and a highly concentrated market, consumers were pushed to sign up for cards with big banks that offer far higher interest rates than those offered by smaller issuers and credit unions.
And big credit card companies are continuing to strengthen their grip on the market. On February 19, Capital One announced it was preparing to acquire banking rival Discover in a $35.3 billion deal. Such a merger of two of the biggest banking companies, if it receives the green light from federal officials, would likely allow the resulting behemoth to wring more profits from consumers.
The deal, consumer advocates have argued, “poses massive antitrust concerns.”
“It is very difficult to imagine how federal regulators could allow Capital One to buy Discover given the requirement that mergers benefit the public as well as insiders,” said Jesse Van Tol, the president of the National Community Reinvestment Coalition, in a statement following the merger’s announcement.
Some lawmakers have urged the Biden administration to block the deal, noting, in particular, Capital One’s long history of predatory practices, such as marketing cards with wildly high interest rates to poor consumers with few other alternatives and saddling them with debt.
“Capital One has a concerning history of mistreating consumers,” wrote Sen. Elizabeth Warren (D-MA), Rep. Katie Porter (D-CA), and eleven other lawmakers in a February 25 letter to the Federal Reserve and the federal Office of the Comptroller.
Rust also emphasized that the merger was emblematic of an increasingly anticompetitive credit card industry.
“The problems the CFPB is pointing out would only get worse if this merger is approved,” he said. But despite federal guidelines around bank mergers requiring officials review such consolidation’s impact on the public interest and consumers, the federal government has usually failed to intervene to stop such market concentration, even as it has become more common.
“We’re seeing more and more mergers that lead to large institutions, and no publicly announced merger has been denied in over fifteen years,” Rust said.
There are signs, though, that federal regulators under the Biden administration are more willing to take on the powerful credit card and banking industry, which spent $39.5 million lobbying federal lawmakers in 2023 alone.
The CFPB has issued a flurry of proposed regulations to rein in big banks and credit card issuers in recent months. In January, the agency proposed limitations on overdraft fees that it said would save consumers $3.5 billion annually, just one of several new proposed rules that are cracking down on banks’ so-called “junk fees.”
On February 29, the agency released another report that took a close look at websites that claim to provide consumers fair comparison information about credit cards, but are in fact rigged by big banks to recommend their products, even when the cards offer exorbitant interest rates.
“Such deceptive marketing practices,” the CFPB wrote in its report on credit card interest rates, “inhibit consumers’ ability to find alternatives to expensive credit card products.” The agency is planning its own public credit card shopping tool for consumers to help combat such misinformation.
Finally, On Tuesday, the agency announced its long-anticipated final rule cracking down on credit card late fees, which was first proposed in February 2023.
Yet federal regulators’ efforts to crack down on credit card companies’ myriad fees and ever-rising interest rates will have to overcome opposition from lawmakers who are well funded by the banking industry. Already, trade groups representing big banks have loudly opposed the CFPB’s new rules on overdraft fees and other such charges — and they’re gearing up to bring a suite of legal challenges against the new late-fee rule.
As the CFPB’s analysis on skyrocketing interest rates shows, these banking companies have billions of dollars on the line.