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The Consumer Financial Protection Bureau is aiming to bring some relief to overburdened credit card customers by reducing late fees.
Under current regulations, credit card companies can charge as much as $30 for the first late payment and $41 for subsequent delinquencies.
The CFPB on Feb. 1 proposed a new rule that would limit fees for late payments to $8, end automatic annual inflation adjustments for late fees and cap late fees at 25 percent of the minimum payment the customer owes.
But with credit card holders struggling with a mountain of debt and interest rates rising, will that make much difference?
“At the margin, you can get into this really terrible cycle where you’re paying late fees, interest is accruing, and you just can never get out from under it,” says Dr. Joe Craig, interim faculty director of the UCCS Economic Forum and chair of the UCCS Department of Economics.
“That’s not what you want in the economy,” Craig says. “You want productive people. So lowering those fees is advantageous to avoid that cycle of someone getting into this crippling debt.”
On the other hand, “it’s not a catch-all fix-all,” he says, because credit card debt is rising and so are interest rates on that debt.
“People are late because they’re struggling,” says Dr. Tatiana Bailey, executive director of Data-Driven Economic Strategies, “but the bigger issue is higher interest rates and the fact that people are having to use credit cards.”
Mountain of debt
Credit card companies collect $12 billion a year in late fees, according to the CFPB. The exorbitant fees some companies charge — even if a payment is made within hours after a deadline — far exceed companies’ costs to collect late payments.
The CFPB is taking comments on the proposed rulemaking through April 3, after which it will issue a final rule.
According to the CFPB, lowering over-the-top late fees will help the millions of Americans who were carrying a total of $925 billion in credit card debt in the third quarter of 2022.
Data from the Federal Reserve Bank of New York shows that credit card balances have risen by $121 billion since the third quarter of 2021 — the biggest year-over-year increase in 20 years.
“Americans’ credit card debt stands just $2 billion below the record set in the fourth quarter of 2019, when balances stood at $927 billion,” states a Feb. 15 post on LendingTree.com. “Thanks to rising interest rates, stubborn inflation and myriad other economic factors, it’s likely just a matter of time before credit card balances surpass the 2019 record.”
Post-pandemic payback
Credit card debt did not increase during the pandemic, Craig says, because the government was providing stimulus payments and people were spending less.
But now, with the end of government handouts and rising inflation, “a lot of people are continuing to finance their lifestyle by using their credit cards,” he says.
Consumers have not lost confidence, which is helping to stave off a recession, he says. But people who were able to save money during the recession may be dipping into their savings, and others are racking up plastic bills.
Bailey says it isn’t surprising that some people are using credit cards or home equity loans to cope with higher prices.
“Savings rates are now down to 3.4 percent [in January 2023] versus 9.1 percent in January of 2020,” she writes in Data-Driven Economic Strategies’ January 2023 Economic Progress Report. “Although delinquencies have only edged up a bit, it’s still concerning to me because savings represent the cushion people have when we have an economic downturn and some layoffs. It’s also concerning because the prime interest rate was up to 7.27 percent in December versus 6.95 percent in November (and 3.25 percent in April 2022). This means consumers are paying more in interest payments.”
Credit card interest rates — which averaged 19.07 percent in Q4 2022, according to LendingTree — follow interest rate increases by the Federal Reserve, though the relationship is not 1 to 1, Craig says.
During the pandemic, “the Fed lowered interest rates down to zero, and at the same time, the government pushed out a ton of funds to businesses and consumers,” he says. “The bill’s got to come due at some point.”
That payback has come in the form of increasing interest rates to slow the economy and curb inflation, and the Fed has indicated we’re in store for one or two more rate raises before rates might start to come down, he says.
“They would like to see inflation down to a consistent 3 or 4 percent,” he said.
Stubborn inflation
Inflation rose by 0.5 percent in January, following a 0.1 percent increase in December, the U.S. Bureau of Labor Statistics reported Feb. 14, and the Consumer Price Index was up 6.4 percent year over year — just 0.1 percent lower than in December.
“That’s almost insignificant in terms of change,” Bailey said. “The thing that’s concerning is that the components of inflation that continue to be the highest are staples — things that people have to buy, like food, gasoline, natural gas to heat their homes, cars and shelter, whether it’s rent or buying a home. People have no choice but to pay these higher prices.
“And it’s not just one or two goods — it’s pretty broad-based. Even clothes went up in January, although usually prices come down after Christmas. The bottom line is that inflation has been pretty stubborn.”
While households that make $300,000 a year can absorb those price increases, people who live paycheck to paycheck are getting hit hard.
“People are using their savings to counter some of these higher prices, and they’re using credit cards,” Bailey says. “If you’re using credit cards to just pay your bills and to buy groceries, you’re digging a deeper hole by also now having to pay more in interest.”
With the possibility of at least a mild recession looming, that’s worrisome, Bailey says.
Almost everyone can get by on far less than we do.
— Joe Craig
“I don’t think we’re going to see huge spikes in unemployment, but there’ll be some more layoffs,” she says. “If some of the people who lose their jobs are people who don’t have much savings and are relying on credit cards, then you start looking at more foreclosures and evictions.”
Tips to lower debt
Credit card holders with high balances may want to take steps to manage their debt. Here’s what financial experts suggest.
• Make a budget and stick to it, WalletHub recommends. Rank your monthly expenses, debt payments and savings, compared with your take-home pay.
• Look at where you can cut down. That doesn’t necessarily mean giving up things, but finding less expensive ways of doing them. For example, make your latte at home to take to work instead of stopping at Starbucks. “Little things really do add up,” Craig says, “and almost everyone can get by on far less than we do.”
• Use cash whenever possible.
• If you have debt across multiple credit cards, “consolidate and get it into one source if you can,” Craig says. “See if you can negotiate with whoever has the debt.” There are professionals who have more leverage to negotiate with companies — for a fee, of course, but be sure to research companies carefully, because not all are legitimate.
• Build an emergency fund. Try to save gradually so that you have a safety net to fall back on. WalletHub recommends setting aside money every month until you have a year’s worth of after-tax income.
• Improve your credit scores. That can lower the cost of your debt.
• Try the avalanche method: Repay your most expensive debt first. Most people with high credit card debt have multiple balances, Wallet Hub says. If so, put most of your monthly debt payment toward the balance with the highest interest rate and make minimum payments on the rest. Once the most expensive debt is paid off, repeat the process with your remaining cards.
• Evaluate your employment situation. What would it take to find a higher-paying job? Can you acquire more skills to become more marketable? If you’re in good standing at your current place of employment, try asking how you can qualify for a better-paying position. “Employers are still saying they cannot find the talent they need,” Bailey says. “Astute workers should still feel confident enough in the labor market to do some of those creative things.”
Find more debt-reduction strategies at wallethub.com and see Bailey’s monthly economic reports at ddestrategies.org.