It’s time to check on credit cards

If you haven’t done so lately, it’s probably time to pay a little more attention to your credit cards.

Interest rates have risen, the economy faces a slowdown, income-tax refunds are likely to drop a bit and other factors point to more people struggling to handle card payments.

Plus, some recent developments could change important credit-card terms.

Caps on late fees?

Late fees on credit card payments have emerged as a problem for some people, prodding the Consumer Financial Protection Bureau to propose a limit on “excessive” charges.

What does the agency consider “excessive”? Some companies charge as much as $41 on each missed payment. The CFPB wants late fees that are “reasonable and proportional” to the costs incurred in handling late payments.

The proposal would cap late fees, possibly to around $8 for a missed payment, and end the automatic inflation increases that some companies charge. The CFPB estimates that the income generated by the largest card issuers from late fees is roughly five times more than the collection costs they incur, which is how it arrived at the $8 figure.

Credit-card companies could charge more than $8 under the proposal if they could prove a higher fee is needed to cover their collection costs.

The proposal also would ban late fees that exceed 25% of a consumer’s required minimum payment. Currently, card companies can charge double the minimum payment owed by a borrower. Late fees cost consumers $12 billion annually, the agency said, and the proposal could shave that by $9 billion. The $12 billion equals more than 10% of all credit card interest and fees charged to consumers.

Congress banned excessive late fees in 2009, but card companies have exploited a loophole to continue charging them, the CFPB contends. In addition to the fees, late-paying consumers also can lose any grace period in paying interest and possibly see a drop in their credit scores.

The bureau is seeking comments on the proposal, after which it will decide whether or not to adopt it. Reaction is mixed so far.

For example, John Berlau, director of finance policy at the free-market Competitive Enterprise Institute, said the rule would translate into higher charges for all consumers, including those who make payments on time. It also would cut into rewards programs and possibly restrict credit-card access for lower-income households, he added.

The proposal would reduce competition, increase the cost of credit and could even result in more late payments, increased indebtedness and lower credit scores, added Rob Nichols, president and CEO of the American Bankers Association.

“If the proposal is enacted, credit card issuers will be forced to adjust to the new risks by reducing credit lines, tightening standards for new accounts and raising (annual percentage rates) for all consumers, including the millions who pay on time,” he said in a prepared statement.

But Rachel Gittleman, financial-services outreach manager at the Consumer Federation of America, said the measure would profoundly improve the well-being of consumers, especially subprime borrowers and people of color.

More emergency bills going on credit

Surveys lately have shown that more American adults would struggle to pay an emergency expense of $1,000 or more. More consumers, a relatively high 25%, now indicate they would have to meet such a large, unexpected bill by putting it on a credit card, reported Bankrate.com. That compares to other options such as cutting back on spending, or asking family members or friends for help.

The timing for increased credit-card reliance has worsened, with card interest rates climbing to 19.95% on average as of early February, according to Bankrate.

“Credit-card rates went up more in 2022 than in any other year since we started tracking (them) in 1985,” said Ted Rossman, a senior industry analyst at Bankrate. “The national average started 2022 at 16.3% and finished at 19.6%.”

In Bankrate’s latest survey of more than 1,000 adults, 43% of respondents said they could pay an emergency bill of $1,000 or more from savings but 57% could not. The 25% opting to put it on a credit card is the highest level in nine years.

Auto-loan affordability declines

New vehicles are a lot more expensive, but having a high credit score can make car buying more affordable.

Nearly half of Americans are feeling less financially confident these days, yet more than half plan to buy a new car or truck in 2023, according to Cars.com. That’s one sign of disconnect. Another is that relatively few people seem to realize how expensive new cars and trucks have become. Cars.com said its dealers are reporting median new vehicle prices of around $42,500, and a recent study by Cox Automotive puts the average at about $49,500.

Auto loans also are more costly, with higher interest rates. Some non-prime customers face car loans with rates above 20% and even some prime customers are paying around 8%, according to Cars.com. On average, shoppers save up less than a year for a down payment.

Nearly half of prospective buyers intend to make a down payment of less than $5,000, according to a Cars.com, which compiled a report on affordability that showcases some of the better vehicle values out there.

In the report, Cars.com includes a calculator to help shoppers anticipate their financing costs. Along with interest rate, the term in months and other key loan features, the calculator allows buyers to track affordability and payments based on credit scores.

Credit stress rising

Rising interest rates and heightened inflation are crimping consumer finances, forcing more people to rely on credit cards and other types of loans to make ends meet.

Delinquencies are increasing, albeit from low levels, while consumer sentiment wanes and personal-saving rates drop to multiyear lows, reported credit bureau Transunion. Bank credit-card balances jumped to $930 billion at the end of 2022 from $785 billion one year earlier, the company, while other types of borrowing also are up including home mortgages and home-equity lines of credit, said Dan Simmons, a Transunion senior director.

Credit scores, meanwhile, have hit a plateau after rising during and soon after the pandemic, when consumers received stimulus funds.

At the end of 2021, 46% of consumers were paying more than the minimum on credit cards and other loans, but that dropped to 43.4% at the end of 2022, said Simmons, who considers this statistic an early warning signal of borrower stress.

Along with higher borrowing costs, inflation also is taking a toll. Households on average spent about $371 more on goods and services in December than a year earlier, reported Moody’s Analytics.