Credit Card Late Fees May Be Illegal

Fifteen years ago, credit cards were largely a means to defer payment of something. A treat. A splurge. Now they are a must have for anyone who wants to shop online or sign up for any internet-based services like Netflix.

According to Harper's Index, we have 12.7 credit cards per household now. CNN Money says we have closer to 20 per household. As a society, we are spending $1.01 for every $1.00 we earn. The average household had close to $10,000 in expensive credit card debt in 2004.

They kinda own our asses now, don't they?

They can set hourly deadlines for your payment that are before they get their mail. So even if your payment arrives on the due date, you will get slammed with a late fee. They can attach automatic rate hikes to late payments (hey dude, it's in the fine print), even if they were to another company (anything credit related). They will take your money over the phone ("do you have a credit card handy?), then charge you a $15 processing fee. The late fees themselves have quadrupled in the past eight years from $10ish to $35ish. The collection of late fees has mushroomed into an industry in and of itself - a $7.3 billion industry! 

Is that legal?
It's legal and illegal. Companies can charge these penalties, but they are supposed to be less than ten times the amount that it costs the company for your payment to be late (see: "State Farm Mutual Automobile Insurance Co. v. Campbell"). The lateness of most payments costs credit card companies pennies. But they'll often charge upwards of $30.00 and sometimes raise your interest rate to boot. 

Blame South Dakoda
Here's the tricky part, it's the states that allow this to happen that are at odds with the law. One UCLA Law professor has developed a model where he/she claims to prove that credit card late fees are punative and that state laws that allow these companies to charge them are unconstitutional. You see, the fees themselves are not unconstitutional, but the enforcement (and enabling) of them is.  In a 1995 court decision, it was ruled that banks can charge late fees in any state, but the enforcement of those fees only occurs in the state where they claim to do business. So they set up shop in any state (shout out to South Dakota!) that allows them to charge the maximum late fee. That, in turn, led many states to compete for the banks business by raising the maximum allowable late fee in their state.

When states compete, you lose.

Maybe we should thank Republicans
You know how Republicans have been pushing for limits on punitive damage awards on behalf of their insurance clients? Well, that same logic is directly applicable to consumers. You see, the court in State Farm v. Campbell (2003) said that awards should not exceed single digit ratio between compensatory and punitive damages. Compensatory damages would be whatever the value of the money is during the time the payment was late...pennies, in most cases. Yet the late fees are somewhere around 30 to 80 times that amount. Hence, the late charge clauses in the credit card contracts should be considered unenforcible.

Laws trumping laws trumping laws
There's a hierarchy of laws to consider. A whole web of state and federal laws have allowed banks to go about their regular business of screwing us. But that's about to stop because according to the Supreme Court, these laws are in violation of the fourteenth amendment's due process clause. Again, it's the enforcement of these laws that will get states and banks into hot water.

Start keeping track of your late fees starting now and hop on the class action bandwagon when it stops in your town. There's money in it for you.