On March 8, the White House released a statement to state legislatures on President Joe Biden’s effort to rein in “junk fees.” Included in this announcement was an endorsement of the Consumer Financial Protection Bureau’s (CFPB) recent proposal to cap credit card late fees at $8 or 25 percent of the minimum periodic payment. The proposal claims to save consumers $9 billion a year but ignores the critical function of late fees in maintaining an efficient financial system. All the evidence points to this plan creating higher tardiness, restricting consumer access to credit and raising interest rates for all credit card holders.

The government initially took aim at credit card late fees in 2009 with the CARD Act, which mandated a 21-day grace period between the billing and payment date and limited late fees to 100 percent of minimum periodic payment or $30 annually adjusted for inflation.

The difference between this policy and the recent proposal is the extent to which they’d limit fees. Whereas the average late fee saw a 20 percent reduction after the CARD Act, the current proposal would do so by 73 percent and eliminate any future adjustments due to inflation.

The Bureau’s current efforts to lower late fees neglect other aspects of consumer welfare. For starters, this proposal ignores why late fees exist in the first place — as a deterrent against tardiness.

Published in its entirety in The Economic Standard.