In an effort to cut down on what he calls “junk fees,” President Joe Biden announced several initiatives this week to fight fees he considers costly and unfair to consumers. This includes working to limit late fees for credit card payments and his comment on limiting overdraft fees back in October.
This comes after the White House Competition Council was created in 2021, tasked with figuring out the unexpected or unjustly high fees consumers pay for basic services — what the president believes government agencies should protect consumers. The government estimates that these initiatives could save American families $12 billion annually, assuming these initiatives are implemented under the law.
But what are these fees? And is there a way to avoid them altogether?
Here’s a closer look at late fees, overdraft fees, and how you can avoid paying them.
Related: President Biden targets fees in major consumer push towards travel and credit cards
What is the late fee?
A late fee is a fee you pay when you don’t make it Minimum credit card payment timely. When is the time limit before you are late? That varies by bank.
Some credit card issuers require you to pay by 5:00 p.m. Eastern time (the end of their business day). Others allow you to pay until midnight on the due date. So it’s important to know your credit card issuer’s policy. Payments after this time can result in fees as high as $41 per late payment.
However, if you make the minimum payment ahead of time, you will not be charged late fees. Remember that only the minimum payment will result in interest on your credit card bill.
Related: The best way to pay your credit card bill
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On Wednesday, the Consumer Financial Protection Bureau proposed a rule banning the “excessive” fees that credit card issuers charge for late payments. CFPB director Rohit Chopra said that these fees exceed any costs that lenders incur as a result of late payments.
In 2009, “Congress banned excessive credit card late fees, but companies exploited a legal loophole that allowed them to escape scrutiny for charging an illegal junk fee,” Chopra said. said. The CFPB says the new rule will cap late fees to $8, or 25% of the minimum payment due — significantly lower than the average the agency currently sees with these fees. .However, late fees can be up to $41.
Related: How to save your credit score after late payment
The CFPB estimates that reducing late fees from $31 to $8 will save consumers $9 billion annually — three-quarters of the $12 billion in late fees consumers pay.
“Spam charges have unfortunately become the norm,” says Chopra, adding that credit card issuers use these outrageous fees as an additional source of profit. Chopra says the new $8 cap is still five times higher than the actual cost of recovering late payments — denying the idea that financial institutions will operate at negative costs. under these new regulations.
According to Chopra, the new rule could go into effect in 2024 after a period of comment. However, it is worth noting that proposed regulations are often subject to challenges, litigation by industry groups, delays and amendments on their way into law.
Related: 3 mistakes people make when getting their first credit card
How to avoid late fees
Making the required minimum payment ahead of time by the bank means you won’t have to pay late fees. Again, check with your bank to see how long it takes to determine when a payment is late on the due date.
Paying the minimum amount due will avoid late fees. It also avoids other penalties, such as interest rate hikes or annual percentage.
However, paying only the minimum amount due can lead to other costs, such as interest on your credit card balance. The best way to avoid paying interest on a credit card is to pay your balance in full each month.
Related: TPG’s 10 Commandments of Rewarding Credit Cards
If you are likely to forget your bill due date, Set up automatic payments on your credit card can help you avoid missed or late payments.
What is an overdraft fee?
Although late fees are assessed on credit cards, overdraft fees are associated with your checking account. These fees are assessed when your account goes negative. How could that happen?
Overdraft fees come from overspending on your account or spending money from your account before it becomes available. The second scenario can happen when a deposit (such as a large check) is temporarily held, but you make a withdrawal in the meantime thinking the money is already available.
As a result, your account balance falls below zero in these cases, which is an “overdraft”. Banks typically charge a fee for this — an average of $35 per case. These fees are similar to those associated with “bounced checks” — when you write a rejected check due to insufficient funds in your account.
The CFPB has targeted fees for bounced checks in 2021 and Many banks agree to eliminate this fee (PDF document).
However, you may be surprised to see overdraft fees even if your bank account balance shows you have enough funds to make purchases. CFPB is targeting these feessays banks use complex and potentially illegal methods to evaluate fees based on the order in which they process transactions — something consumers don’t have access to or understand clear.
The agency estimates that eliminating these fees will save consumers more than $1 billion annually.
How to avoid overdraft fees
Making sure you always have a positive balance in your bank account and don’t make payments by check or debit card higher than your current balance sounds simple. However, there are several factors involved.
First, be careful with the holds placed on your deposit. If your bank doesn’t offer a five-day deposit, that means you can’t use it to pay bills or withdraw funds until it’s available. Spending on unavailable deposits will cause an overdraft.
Also, holdings on your debit card can cause overdrafts. For example, if a hotel places a hold for incidentals on your debit card, the money may not be released to your account (available to you) for several days after you pay. You cannot spend or withdraw until the funds are available. Your usable account balance may be lower than you think with a hold on your debit card.
Related: 5 things you need to know about keeping debit and credit cards
So it’s important to understand exactly how much money is available in your checking account when you make a purchase or cash out. You also need to understand the schedule your bank uses to determine when your deposit is available, as that may not be immediate.
Related: 4 reasons why you shouldn’t use your debit card
bottom line
Consumers don’t like paying too high a fee. Fees also add to the burden on those who are having a hard time making payments on time. If your checking account balance is negative, it means there is no money in your account. That problem only gets worse when an additional fee is charged — causing your balance to turn even redder.
The federal government has proposed action against overdraft and late payment fees, claiming that these will save consumers a significant amount of money each year.
However, there are methods you can use to avoid these fees. Paying your bills on time, keeping a close eye on your account balance, and understanding the holds placed on your account can help you avoid these fees altogether. Spending within your means (to avoid overdrafts and interest on credit cards) is possibly the most important tip.
The fees discussed in this article may be more common for people who are struggling with debt management. If that’s you, here are some resources that can help:
