Last month’s decision by the Consumer Financial Protection Bureau (CFPB) to cap credit card late fees at no more than $8 a month appears destined to earn a place in the annals of unintended consequences.
On the surface, of course, it sounds great. No one likes being hit with late fees for missing minimum payments, which previously averaged about $32 a month but vary from credit card to credit card. The CFPB estimates that the change will save American families about $220 a year in lower taxes. In his State of the Union address last month, President Joe Biden hailed the change as part of his global war on “junk taxes.”
“They don’t like it. The credit card companies don’t like it,” he said.
Some Americans might not like it, either, especially if the result were higher interest rates on credit card purchases or stricter limits on who has access to credit in the first place. These are some of the likely outcomes that Vince Ginn, an economist and former White House associate budget director, identifies in a new job at the Ecolib blog.
“Although we might save some money if we make mistakes and pay late, credit card companies will find ways to make up for this loss of income,” he writes. “In an effort to protect us from high late fees, the government will prepare us for a situation where credit will be harder to obtain and more expensive.”
These imposed changes always involve trade-offs that politicians fail to see or understand. As I explained in a piece for this month’s issue of Reason, the 2010 law that capped debit card scanning fees to save consumers and businesses pennies on each transaction led consumers to see few benefits and accelerated a cultural shift toward credit cards , which usually charge companies even higher fees. Now, predictably, there is a similar attempt to limit credit card scanning fees, which will inevitably have its unintended effects.
As for the CFPB’s move to limit late fees, there’s a possibility that Congress could get involved. Sen. Tim Scott (R-SC), the top Republican on the Senate Banking, Housing and Urban Affairs Committee, introduced a bill Monday to overturn the rule using the Congressional Review Act, which allows the Congress has the final say on the agency’s executive actions.
“Now is the wrong time to play political games that limit access to credit,” Scott said in a statement. “But that’s exactly what the CFPB’s rule capping credit card late fees will do: It will decrease the availability of credit card products and important financial services, particularly to Americans who need them most. “
It’s also worth considering the similarities between the CFPB’s new rule and the Biden administration’s continued attempts to forgive student loan debt. While capping late fees on credit cards isn’t that outrageous — or that likely to cause perverse incentives — both actions reflect the Biden administration’s view that the government should protect people from the potential economic downsides of their voluntary decisions .
Despite Biden’s attempt to call it a “junk tax,” it really isn’t. The only people who pay credit card late fees are those who make purchases on credit and then fail to make the minimum monthly payments on their balances.
It’s certainly possible to sympathize with people who have missed payments due to financial hardship, but that doesn’t change the fact that such fees are a key part of the contractual obligation anyone takes on when using a credit card. Late fees are clearly indicated on each monthly statement. They exist to encourage timely payment of what you owe, the same reason the IRS will charge you a penalty for not paying your taxes this week (but for some reason the CFPB doesn’t seem interested in preventing those commissions).
To the extent that limiting late fees will result in higher interest rates for all credit card users – not just those who default on minimum payments – then the effect of the CFPB rule will be to impose marginally higher costs on individuals and families who use credit cards responsibly to cover the obligations of those who have not. This is fundamentally unfair and none of the government’s business.