Credit Card Late Fees Might Be Unconstitutional?

Over at the Consumer Law & Policy Blog they’ve posted the abstract of a article that considers the constitutionality of credit card late fees. Apparently, there are “constitutional constraints upon the imposition of punitive damages.” Neat. The article by Seana Shiffrin and is called “Are Credit Card Late Fees Unconstitutional?”

State Farm Mutual Automobile Insurance Co. v. Campbell articulated serious and specific constitutional constraints upon the imposition of punitive damages. Justice Kennedy’s majority opinion announced that, apart from exceptional cases, punitive damages should not exceed nine times the amount of the actual losses sustained by the plaintiff and should usually be far lower…

The constitutional standards articulated in State Farm call into question the constitutionality of those statutes and regulations that authorize credit card issuers to charge legally enforceable late penalties but place no significant limitations on their size.

What a lovely idea!

Is Enforcement of Credit Card Late Fees Unconstitutional? [CL&P]


Edit Your Comment

  1. rmz says:

    Meh. If they can’t charge late fees anymore, they’ll just raise the interest rates to compensate. If they don’t get their money one way, they’ll get it another way.

  2. curmudgeon5 says:

    Wouldn’t this be irrelevant because you agree to a contract with your credit card company when you get the card, and that contracts spells out specific late fees?

    The constitution applies to relations between the government and the people, not to private businesses. So a court couldn’t assess an unreasonably high penalty, but it has no bearing on the right of private citizens and companies to mutually enter into contracts spelling out all manner of penalties.

  3. Buran says:

    @curmudgeon5: Binding contracts are void if they require you to do illegal things.

  4. curmudgeon5 says:

    But wouldn’t the fact that the constitutional protection against unreasonable damages applies only to interactions with the government (not private transactions) make it moot anyway? Or am I misunderstanding?

  5. FreemanB says:

    From what I saw, the actual decision involved punitive damages, not late fees. Late fees are stipulated in the contract you entered into with the CC company. If the late fees were extremely excessive and not disclosed effectively, then there would be some basis for the argument.(“$1,000,000 for each day your payment is late”) But it is a stretch to apply a limitation on excessive punitive damage rewards from civil trials to credit card late fees.

  6. mantari says:

    Uh…. what consitution? The US Constitution or one of its ammendments? (Which one?) Some constitution for the state of California? What is the exact wording of the clause that it is said to violate?

  7. TechnoDestructo says:


    GOOD. They’ll get their money the way I was taught they were SUPPOSED to do it in middle school.

  8. Greganda says:

    These fees are being presented as a penalty for going against the terms of agreement, yet they are in actuality a significant profit stream for the lender. says that in 2002 (old article, I know) 33% of credit card profits came from fees, and 25% of that was from penalty fees.

    If something is a penalty (which means it is meant as a disincentive to repeating the breach) how can that be reconciled with the idea that it is also an important profit source (and therefore the lender has powerful incentive to keep it coming). Can one party go into a contract with the intention of tripping up the other party and then claiming injury?

    Link to Bankrate article: []

  9. Cowboys_fan says:

    I have no idea when it comes to law but I do feel some late penalties are astronomical considering actual losses and should be limited to some extent. Keep in mind, most large companies don’t pay their bills on time, yet overcharge us every time we’re late. They don’t practice what they preach, and profit on both ends.

  10. humphrmi says:

    @curmudgeon5: I’m only a amateur constitutional scholar (part time), not a lawyer. But mention of “punitive” damages (if it exists) would bring in the specter of application private business, otherwise they wouldn’t be called “punitive.” And one could argue (whether the Supremes would accept it or not is another question) that a late fee is administration of “punitive damages” since it is well beyond recovering the cost of the late payment – i.e. intended to prevent behavior, not just compensate for it. That is also what makes me believe that this would apply to the private sector, since the public (i.e. government) calls their punitive fees “fines” and those fines are controlled in other ways.

    Eh, whatever, interesting thought…

  11. bk2school4me says:

    If I am late on a payment I have no problem paying the late fee, however, I have a problem when they want to raise the interest fee from 14.99 % to 29 % if I am only late one time. I am paying off my current cards and refusing to purchase new ones due to this issue. Additionally, I have never been late on my cards but because they raise the interst too high if you are–I no longer care to take out new credit–they can keep their cards.

  12. MatthewVA says:

    That’s good news, especially as credit card companies are expected to increase late fees. They lure you in with rewards and cash back and then sock you with hidden fees. They treat merchants the same way with interchange fees.

  13. mac-phisto says:

    @curmudgeon5: if you read the article, it says that it doesn’t make the fees illegal, but it makes their collection unenforceable under the law. what does this mean? well, it means that if you refuse to pay them, the cc companies can’t take you to court to recover their money.

    theoretically, one could always pay late & still pay just the owed amount (plus interest) w/o paying additional late fees &/or over-limit fees (& the interest charged on the fees). the cc company would have to prove that the fees were proportional to a cost incurred.

    this could also have ramifications in banking regarding o/d fees.

  14. mac-phisto says:

    @MatthewVA: interchange fees are not punitive fees & are not really relevant to the argument. if merchants are tired of the extortion, they can simply accept cash only.

    but no, merchants want all the advantages & extra business of accepting plastic without any of the responsibility of fraudulent charges or collection of payments. get real.

  15. Jiminy Christmas says:

    If I’m late on a credit card payment it doesn’t matter if it’s one day or three weeks, the fee is still $39. (Listen here you whippersnapper, I remember the days when a late fee was $15.) What I want to know is this: If I pay my credit card 3 weeks late, what does that actually cost the credit card company?

    They are certainly entitled to a markup on services. By way of comparison though, if I go shopping in a snazzy department store what’s the markup there? Maybe wholesale cost of the goods + 200%? Now, I tend not to pay retail in high-end department stores, but a 200% markup isn’t beyond reason for covering overhead and profit. So by that logic, does it cost Citibank or Chase $13 to deal with my late payment? Or are they using a late payment as an opportunity to make a 1000% profit on their actual costs?

  16. Crazytree says:

    @Buran: How do you think the SCOTUS is going to come down on this one?

    I would love to see State Farm’s appellate brief… likely it will include language to the effect of “it is a service fee paid to compensate us for the added time and effort needed to effectively track and service a delinquent account, including sending late notices, reviewing APRs, etc. and therefore is NOT a penalty but a fee.”

  17. FreemanB says:

    The actual supreme court ruling can be found here: []

    What they considered “excessive” punitive damages was the award of $1 million in compensatory damages and $145 million in punitive damages. The punitive reward was 145 times higher than the actual damages. They said that only rarely should punitive damages exceed single digit multipliers.

    I’m not sure what the normal penalty is for a late credit card payment, but I don’t think it would qualify as excessive under this ruling.

  18. I like, I like!

  19. cde says:

    @FreemanB: 35 dollars, plus defaulting interest fee.

    It’s like when the bank charges you 35 dollars for overdrawing 1 dollar.

  20. MR2Tyler says:

    Unless I’m missing something, this doesn’t compute at all. Curmudgeon hit this on the head: State Farm stands for the proposition that the Due Process Clause limits courts’ ability to impose excessive punitive damages on defendants. The Due Process Clause places no limits on what private parties (like credit card issuers and card holders) may contract to do. If a card agreement establishes a one million dollar fee for a late $50 payment, the contract might be void because of the common law doctrine of unconscionability. But the Due Process Clause has nothing to do with it.

  21. mac-phisto says:

    @MR2Tyler: i don’t think you missed anything except the part in the article that explained that this does not make late fees illegal, but could make them unenforceable.

    hypothetically, if you didn’t pay a $1000 credit card bill for a year & the cc co. took you to court, the assumption contained within the article is that they could win a judgment for the $1000 you owe them & finance charges, but they might have some trouble collecting the late fees & compounded interest.

  22. mac-phisto says:

    @Crazytree: i’m not an expert on this, but i believe the credit card cos. classify penalty fees as such so they don’t affect the APR for the TILA disclosures & statements. otherwise, i think they would have to adjust their APR calculations to include the fees.