Revised Federal Rules to Allow Late Fees on Credit Cards to Increase in 2017

American Express is the first issuer to announce its plan to take advantage of the revision

Revised Federal Rules to Allow Late Fees on Credit Cards to Increase in 2017
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November 28, 2016

The federal government has raised the allowable limit on certain late fees for credit cards.

The Wall Street Journal (WSJ) reports that American Express (Amex) is planning to be the first card issuer to take advantage of the revised plans. Beginning in January 2017, the company will charge its customers as much as $38 if they make more than one late payment over six months. At one dollar more than Amex's previous highest fee, the new amount is the highest allowed under the updated guidelines issued by the Consumer Financial Protection Bureau (CFPB).

The Card Act placed a cap on such fees when it was passed in 2009, cutting into the amount of revenue generated by penalty fees for credit card companies in the U.S. Unsurprisingly, the industry wants that revenue back, and it has been trying creative methods to make up the difference since the law was passed. For instance, issuers are luring new customers with rewards programs and various other promotions, but it is doing so at a cost. Those promotions are expensive for the issuers, so the customers have to pay a hefty price to participate.

Amex in particular has reason to raise its fees as much as possible. Its revenue growth has been relatively slow, and in terms of business, it concentrates more on cards than do other large banks such as JP Morgan Chase and Bank of America.

"There are business costs associated with not paying on time, and late fees are intended to recapture some of that cost," Amex stated, adding that it is only "a very small number" of customers who miss two payments over a six-month period.

However, ConsumerAffairs notes that late fees still add up, estimating that such penalties will likely total more than $12 billion in 2017 for all card companies.

Spokesmen for JP Morgan Chase, Bank of America, Citigroup, and Discover all confirmed to WSJ that their companies' highest late fee remains at $37. A Capital One spokewoman said that its maximum late fee is $35.

According to consulting firm R.K. Hammer, credit card companies received $11.4 billion last year in penalty fees. Although this is close to the $11.8 billion that annual fees netted the companies, it is around half the amount earned in 2009.

Cash-advance fees earned $25.1 billion for card issuers in 2015.

Before the Card Act was passed, maximum late fees ran around an average of $39. The CFPB set the highest amount allowed for repeat late payments at $35 back in 2013. Later the agency raised that amount to $37, and it has now authorized an increase of $1—or 2.7 percent—to $38 beginning in January 2017.

Federal limits do not apply to business cards. Last year, CreditCards.com conducted a survey that revealed a range of late fee penalties on corporate cards from $10 to $49. The current cap on the late fee for first-time offenders is $27.

CFPB data indicates that late fees are incurred by around 20 percent of active credit card accounts. Nilson Report numbers show that that percentage translates to around 170 million accounts.

Although historically Amex has served more affluent customers, it has been working on expanding its reach into the mass market, resulting in more opportunities for collecting late fees.

Amex does not disclose the amount of revenue generated from its late fees. Account delinquency and default rates have slowly grown across the industry over the past several months, but they are still unusually low.

Although credit card companies were initially unhappy at many of the limits placed on them by the Card Act, they ultimately changed the ways they did business in order to account for those limits. Credit card operations are one of the most profitable businesses conducted by large banks at this time, partially because of low rates of default and more customers who are creditworthy.

There are some companies who are trying to lure new customers by charging few or no late fees. The fees are waived on certain Discover and Citigroup cards for the first late payment, while Pentagon Federal Credit Union's Promise card claims to have no late fees attached at all.

One little-known fact is that customers can often have a late fee waived by simply asking the credit card company to do so.

Matt Schulz works as a senior industry analyst at CreditCards.com. "About 90% of people who ask for a late-fee waiver get it, but only about 25% of people even ask," he said.