Banks will only be able to charge customers a maximum of $8 each time they miss a monthly credit card payment, under a new rule announced today.
The average late payment fee from American banks is $32 per statement,according to the Consumer Financial Protection Bureau, which is behind the new rule.
Capping the penalty at a quarter of that level means 45 million credit card users will save an average of $220 a year.
The agency said that over the last decade,banks have hiked late fees using 'the excuse ofinflation' to createan 'irresistible revenue stream'.
The rule will benefit the poorest Americans most - those who readily find themselves unable to pay off their credit card balances and rack up fees as a result.
Banks will only be able to charge customers a maximum of $8 each time they miss a credit card payment under a new rule finalized on Tuesday
CFPB director, Rohit Chopra (pictured), said banks had been hiking their credit card late fees and been using inflation as a false justification
'The current rule means large banks profit when borrowers inadvertently miss a payment or struggle to pay on time,' said Rohit Chopra, director of the watchdog.
Although the CARD Act in 2010 limited banks to charging customers no more than the costs they incurred due to the late payment, many have since exploited a loophole in the law, regulators said.
The loophole was that banks could charge what they wanted as long as they stayed below a certain threshold - but that threshold increased due to inflation adjustments.
At the same time,credit card companies have moved to cheaper, digital business processes that reduced their own costs and offered them a window to profit.
Under the new rule, the threshold will be reduced to $8.
'In our review, the CFPB found that this has turned into a massive loophole that has allowed companies to charge unjustifiably high fees ever since,' said Chopra.
'Almost all of the credit card giants have hiked their fees every year in lockstep, using inflation as an excuse,' he added.
Credit card companies charged more than $105 billion in revenues in 2022, according to consumer advocacy groupthe Consumer Federation of America
Adam Rust, director of financial services for the Consumer Federation of America - a non-profit that campaigns for the rights of consumers - spoke out in favor of the new limit.
'The CFPB's new rule prioritizes the needs of cash-strapped households ahead of big bank profiteering,' he said.
'It closes the loophole that permitted this form of price-gouging and injects fairness where it has been sorely needed,' he added.
The CFA also sought to debunk a number of claims made by critics of the new rule, most notably the argument that eliminating the source of revenue for credit card issuers would harm consumers in the long run.
It also said that credit card benefits such as air miles or cashback, relished by many Americans, would remain unaffected by the cap.
These are generally offered to peiople with good credit records. Those with a poor credit scorerarely receive the same benefits, it said.
The consumer advocacy group also pointed to the overall health of the US credit card industry.
'Credit card companies charged more than $105 billion in revenues in 2022 and with increases in interest rates and outstanding balances since then, their revenues are likely to be higher regardless of how much they can charge for a missed payment,' it said.
Last month Capital One said it would buy Discover for $35 billion - a deal that would bring together two of the nation's largest credit card companies
The growth of the credit card industry is partly whyCapital One announced it would buy Discover Financiallast month for $35 billion.
The two companies, which are two of the largest credit card issuers, are also two companies whose customers regularly carry a balance on their accounts.
The war on credit card late fees is part of a broader agenda by the Biden administration to eliminate 'junk fees' incurred by US consumers in various industries.
The White House Council of Economic Advisers produced an analysis indicating that the Biden administration's efforts will eliminate $20 billion in annual junk fees.
The analysis found that consumers pay about $90 billion a year in junk fees, on things like concerts, apartment rentals and bank accounts.
