Video narrated by Eric Gardner, reporter at More Perfect Union

Eric Gardner: This may be the biggest scam that we’ve all just decided is normal. Every year, $12 billion is transferred from the poorest Americans to the richest corporations. 

The whole thing is almost completely arbitrary, and it’s a decidedly modern invention: it happens because a generation ago, a major bank escaped financial ruin by exploiting an obscure supreme court ruling.

For the last 25 years, Americans have paid the price.

That scam has a name: credit card late fees. 

Elyse Hicks: These fees have become a profit center for big banks like Bank of America, JP Morgan Chase, Discover, American Express, to target subprime borrowers and trap them into cycles of debt.

Eric Gardner: That’s Elyse Hicks, she’s an expert on consumer finance. We sat down with her to understand why late fees are a scam and how the Biden administration could return $9 billion to consumers with the stroke of a pen.

Elyse Hicks: The issue is huge. Right now, American consumers are paying $12 billion a year in credit card late fees. In 2022, approximately 42 million American consumers said that they missed a credit card payment.

Eric Gardner: So if we just do some basic math here, that’s roughly 42 million Americans who are paying an average $285 a year to some of the richest corporations all because they didn’t have money to pay a bill.

The most insane thing is this wasn’t even a problem a generation ago. In 1996, a California cardholder argued that she shouldn’t have to pay a credit card late fee because they violated California’s consumer protection laws. 

The argument went all the way up to the Supreme Court, who sided with the banks. They ruled that banks could charge any fee they wanted as long as it was legal in the state where the bank was headquartered. 

That’s why most credit card companies are based in South Dakota and Delaware, because those are the states with the most lax consumer protection laws.

[Clip of American Pie]: Delaware.

Eric Gardner: Banks took advantage of the ruling pretty quickly. In 1995, the average credit card late fee was under $13. 

By 2005, the average late fee had soared to almost $34. That’s an increase of 115% when adjusted for inflation. 

And remember, this is what a computer looked like in 1996. That’s what banks were using to process late fees. You’d think that, with better computers and AI, the banks would get more efficient at everything, including processing late fees. But somehow, the fees kept increasing. Something needed to be done. 

[Clip of Barack Obama]: The sun’s shining, birds are singing. Change is in the air. 

The financial crisis gave the Obama administration an opportunity to provide some relief. Working with the financial industry, the Federal government determined that late fees should be set at $25. 

It’s estimated that this action saved consumers $7 billion a year. But there was a catch. Even at the time, consumer advocates said that $25 was too high. But perhaps more importantly, the rule tied the fee to inflation.

So as long as companies followed the government’s guidelines and didn’t raise fees higher than inflation, they didn’t need to show that their penalties were reasonable or proportional. 

Elyse Hicks: There has been this loophole in that regulation that has allowed big banks to charge more and more and more for credit card late fees.

Eric Gardner: That loophole brings us to today where credit card late fees are big business for American banks.

Last year Discover booked more than $400m in late fees.

Capital One more than tripled that number. It’s about 10% in total fee revenue each year.

Fining people when they’re late on a payment when you’re already charging them interest. That’s easy money.

[Capital One Commercial]: “the easiest decisions in the history of decisions”

Eric Gardner: Now banks, they do have an argument to justify the exorbitant fees. 

They claim late fees are needed to help promote consumer discipline and offset losses from non-payments.

Here’s what the American Bankers Association, one of the major financial lobbying groups, said about the fees in a comment to the Federal Government

“Late fees are an important tool for encouraging consumers to pay on time and develop good financial management habits, which can help them build a good credit history and avoid being overwhelmed as unpaid balances rise.”

But there’s just one problem with this argument.

Elyse Hicks: I haven’t found any evidence that suggests that late payment penalties, um, you know, make people pay their bills on time. You can’t make people pay what they don’t have. When you don’t have much wealth to begin with, you’re using credit cards to buy your essential needs because your paycheck is not covering it.

Eric Gardner: So what about the cost to banks? That’s another one of their arguments. The idea is that banks need these fees to offset nonpayment.

Elyse Hicks: These fees do not reflect the amount that it costs credit card issuers or the banks.

Eric Gardner: In June of 2022, The Biden Administration started asking the same questions. Do the costs to process late payments really increase with inflation? Or is it more reasonable to expect that costs are going down with further advancements in technology every year?

The Consumer Financial Protection Bureau asked the industry to open the books, to provide them with data about late fees, late payments, and the impact on their business. The agency analyzed the bank submissions and the answer they came up with for a fair late fee was $8. That would be a huge dropdown from the industry average of $31.

[Clip of Joe Biden]: We’re cutting credit card late fees by 75% from $30 to $8.

Elyse Hicks: This action has the potential to transfer wealth back into communities that have historically had their wealth extracted from them.

Eric Gardner: So let’s review. Credit card late fees are much higher than they used to be. And that’s in spite of the fact that technology is way better than it used to be. It’s hard not to see that as anything other than a way for banks to make billions of dollars by preying on the most economically vulnerable people in our country. 

Banks are sure to fight the Biden administration’s proposal. But this is where you come in. By leaving a comment to the CFPB, you can make sure that Americans who are late on credit card payments are never ripped off again.