Proposal to restrict late and overdraft charges: How to keep away from them within the 1st place – The Points Guy

In a bid to slash what he calls “junk fees,” President Joe Biden introduced a number of initiatives this week to fight charges that he sees as pricey and unfair to customers. This contains working to restrict late charges on bank card funds and is along with remarks he made on curbing overdraft charges again in October.

This comes after the creation of the White House Competition Council in 2021, tasked with discovering unfairly excessive or shock charges that customers should pay for primary companies — one thing the president believes authorities companies ought to defend customers towards. The authorities estimates that these initiatives might save American households $12 billion yearly, assuming these initiatives are applied as legal guidelines.

But what are these charges? And is there a option to keep away from them altogether?

Here’s a more in-depth have a look at late charges, overdraft charges and how one can keep away from paying them.

Related: President Biden focusing on charges in huge shopper push on journey and bank cards

What are late charges?

Late charges are charges that you simply pay when you do not make your minimal bank card fee on time. When is the cutoff time earlier than you are late? That varies by financial institution.

Some bank card issuers require you to pay by 5 p.m. Eastern time (the top of their enterprise day). Others assist you to pay till midnight on the due date. Thus, it is essential to know your bank card issuer’s coverage. Paying after this time can result in charges as excessive as $41 for every late fee.

However, if you happen to make your minimal fee by the cutoff time, you will not pay a late price. Remember that making solely the minimal fee will result in curiosity in your bank card invoice.

Related: The finest option to pay your bank card payments

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On Wednesday, the Consumer Financial Protection Bureau proposed a rule to ban “excessive” charges that bank card issuers cost for late funds. CFPB Director Rohit Chopra stated that these charges enormously exceed any prices that lenders incur from late funds.

In 2009, “Congress banned excessive credit card late fees, but companies have exploited a regulatory loophole that has allowed them to escape scrutiny for charging an otherwise illegal junk fee,” Chopra said. The CFPB said this new rule would cap late fees at $8 or 25% of the minimum payment due — significantly lower than the average of $31 the agency currently sees with these fees. However, late fees can be as high as $41.

Related: How to save your credit score after a late payment


The CFPB estimates that reducing late fees from $31 to $8 would save consumers $9 billion annually — three-quarters of the $12 billion in late fees consumers pay.

“Junk charges have sadly turn into the norm,” said Chopra, claiming credit card issuers use these excessive 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 — negating the idea that financial institutions would operate at a negative cost under these new regulations.

The new rule could take effect in 2024 after a comment period, according to Chopra. It’s worth noting, however, that proposed regulations usually are subject to challenges, litigation by industry groups, delays and modifications on their way to becoming law.

Related: 3 mistakes people make when they get their 1st credit card

How to avoid late fees

Making the minimum required payment by your bank’s cutoff time means you won’t pay a late fee. Again, check with your bank to see what time it uses to determine when payments are late on the due date.

Paying the minimum amount due will avoid late fees. It also avoids other penalties, such as raised interest rates or annual percentage rates.

However, paying only the minimum amount due can lead to other expenses, such as interest on your credit card balance. The best way to avoid paying interest on credit cards is to pay your full balance each month.

Related: TPG’s 10 commandments of credit card rewards

If you’re likely to forget your bill due dates, setting up autopay on your credit cards can help you avoid missed or late payments.

What are overdraft fees?

While late fees are assessed on credit cards, overdraft fees are related to your checking account. These fees are assessed when your account goes negative. How can that happen?

Overdraft fees come from either overspending on your account or spending money from your account before it is available. The latter can happen when deposits (such as a large check) are put on hold temporarily, but you make withdrawals in the meantime thinking that money is already available.

Thus, your account balance goes below zero in these instances, which is an “overdraft.” Banks typically assess fees for this — $35 per instance, on average. These are similar to the fees related to “bounced checks” — when you write a check that is rejected due to insufficient funds in your account.


The CFPB targeted fees for bounced checks in 2021, and many banks agreed to end these fees (PDF document).

However, you may be surprised to see an overdraft fee even when your bank account balance shows you have sufficient money for a purchase. The CFPB is targeting these fees, saying banks use complex and potentially illegal methods to assess fees based on the order in which they process transactions — something consumers don’t have access to or clearly understand.

The agency estimates that eliminating these fees will save consumers more than $1 billion annually.

How to avoid overdraft fees

Ensuring you always have a positive balance in your bank account and not making check or debit card payments that are higher than your current balance sounds simple. However, there are several factors involved.

First, be careful with holds placed on your deposits. If your bank won’t make a deposit available for five days, that means you cannot use that money for bill payments or withdrawals until it’s available. Spending against unavailable deposits will cause an overdraft.

Additionally, holds placed on your debit card can cause overdrafts. For example, if a hotel places a hold for incidentals on your debit card, the funds may not be released to your account (becoming available to you) for several days after you check out. Until that money becomes available, you can’t spend or withdraw it. Your usable account balance may be lower than you think it is when there are holds on your debit card.

Related: 5 things you need to know about debit and credit card holds

Thus, it’s important to understand exactly how much money is available in your checking account when you make a purchase or withdraw cash. You also need to understand the timeline your bank uses to determine when your deposits become available, since that may not be instant.

Related: 4 reasons why you shouldn’t use your debit card

Bottom line

Consumers don’t love paying extreme charges. Fees additionally place extra burdens on these struggling to make funds on time. If your checking account steadiness is damaging, meaning there is no cash in your account. That downside is simply exacerbated when a further price is tacked on — placing your steadiness additional into the pink.

The federal authorities has proposed motion towards overdraft charges and late-payment charges, claiming these will save important sums for customers every year.

However, there are strategies you may make use of to keep away from these charges. Paying your payments on time, carefully monitoring your account balances and understanding holds positioned in your account might help you keep away from these charges altogether. Spending inside your means (to keep away from overdrafts and curiosity on bank cards) could also be a very powerful tip of all.

The charges mentioned on this article could also be extra frequent for these struggling to handle debt. If that is you, listed below are some assets which will assist: