What is a Late Fee? How Missing Payments Can Cost Money and Inflict Credit Damage

Some people consider punctuality to be a virtue. But nobody’s perfect. We’ve all arrived at an occasion or two later than we would have liked.

Arriving late to something can be embarrassing. But when you’re late making a payment to a business, you may not feel any shame at all. Your friends and colleagues probably won’t judge you for missing a financial obligation, but the business you owe may penalize you another way — in your wallet.

Late fees are costs creditors and other businesses charge when you don’t make a payment by its due date. 

I’ll be focusing on late fees lenders and creditors charge in this article, but other entities, such as landlords, also charge late fees when you miss a payment due date. 

Late fees may surprise those new to the world of borrowing, but those of us who remember renting movies may be better conditioned to avoid them. Video stores used to charge a late fee when a video wasn’t returned within a specified time frame. Racing across town to drop a VHS cassette or DVD into a rental store’s return slot by midnight was a rite of passage for teens in the latter part of the 20th century. 

Fortunately, you don’t have to be Dale Earnhardt Jr. to avoid a creditor’s late fees. You only need a bit of knowledge and careful planning. I’ve thoroughly investigated late fees and how to evade them, so let’s get this show on the road.    

Credit cards and loans empower us to buy things today and pay for them over time. That may sound too good to be true, but there’s more to the story. Creditors aren’t in the lending business just to bring smiles to our faces — they’re in it to make a profit.

One of the ways creditors produce revenue is via fees, including charges for when you submit a payment past its due date.

Credit Card Late Fees

Your monthly credit card bill lists the transactions you made since your last bill and any additional charges you’ve accrued. Your issuer will sum all the amounts you owe and represent it as one figure — the balance. If you pay your balance in full and on time each month, then you needn’t worry about being charged late fees.

Your card issuer will also list the minimum payment due on your bill. 

You can avoid late fees by paying the minimum amount due each month, but you’ll accrue interest charges on the remaining portion of your balance.

Issuers charge late fees if borrowers don’t submit the minimum payment by the due date listed on a billing statement. Missing your due date by even a single day can result in a late fee. When sending payments through the mail, be sure to account for delivery times.

Credit card companies can charge you up to $30 for your first late payment. If that seems exorbitant, you’ll definitely want to sidestep incurring additional late fees. After your initial late fee, issuers can charge up to $41 for each subsequent late payment. 

Credit card agreements detail how much your issuers charge for late fees.

The Consumer Financial Protection Bureau is attempting to limit how much issuers can charge for late fees, but that effort hasn’t been finalized.

Loan Late Fees

Many of the most expensive purchases people ever make wouldn’t be possible without an outside infusion of cash. Loans often help us buy our cars, houses, and other big-ticket items.

Loan providers expect regular payments from borrowers. Customers may be assessed a late fee when they miss payment due dates. 

Some lenders extend leniency to their customers by giving them a buffer, known as a grace period, to submit their payments late without charge. Grace periods differ by lender but can last a few days or weeks past a payment’s due date.    

Late fees on loans are typically charged as a flat fee or a percentage of the missed payment amount. Review your loan agreements for details regarding how your lender assesses late fees.

A friend of mine once rented the movie “Gremlins” from a video store and subsequently lost the DVD. The business charged her $1 for each day she didn’t return the film, which annoyed her, but not as much as the $300 bill they sent her when it wasn’t returned after 90 days. 

That was the store’s policy at the time, and I suppose it was an effective one because she never lost another DVD rental again.

Late fees may not greatly impact your credit score, but they can be a symptom of larger financial problems. And those financial gremlins could wreak havoc on your credit over time. 

Impact on Credit Scores

Late fees won’t necessarily damage your credit scores, but if you don’t make a plan to avoid them, they could lead to credit score impact in the long run. Consider multiple late fees a giant flashing warning sign that something may be amiss with your ability to make payments on time.

Payment history is a big component (35% or more) of consumer credit scores, and your score can plummet if you miss a payment due date by 30 days.

Those with pristine credit should be especially mindful of this, as their scores have more room to fall than people with bad credit. 

But don’t stress over the credit score impacts of missing your due date by a day or two. Lenders report late payments to credit bureaus when a borrower’s payment is at least 30 days late. And credit score damage continues to mount if you withhold payment longer.

So don’t let one missed payment snowball into an avalanche of credit score chaos. Check your credit reports to verify that creditors report accurate information about your payments to the bureaus. The impact of a late payment on your credit score will diminish over time, but they can stay on credit reports for up to seven years.

Late fees can also impact your credit utilization ratio. Credit utilization ratios compare the total amount of credit you’ve used with the total credit available to you. 

On-time payments on credit accounts lower the amount of outstanding debt you have and, in turn, lower your credit utilization ratio. A lower credit utilization ratio can boost your credit score. 

Increased Debt

Consumers who incur multiple late fees may find themselves in financial turmoil quickly.

Those who’ve struggled with debt know that any amount added to your overall debt figure just makes that light at the end of the tunnel seem fainter and further away. 

Late fees can also accrue interest, meaning a relatively small initial fee can grow over time if not addressed.

You may think you can ignore late fees because they’re relatively small compared to the overall size of a loan or the limit on your credit card.

But in “Gremlins,” one of the characters thought it wasn’t such a big deal to give a Mogwai some ice cream after midnight, and look what happened.

Possible Interest Rate Hikes

Credit card issuers entice people to apply for cards by offering promotional rates. But if you miss a payment, your card issuer may replace the promotional rate on your card with a penalty annual percentage rate (APR).

Penalty APRs are generally much higher than promotional APRs.

Even missing one payment due date can cause your issuer to raise your APR or even lower your credit limit.

You may have chosen your credit card due to its attractive APR, so be careful not to miss a due date and end your access to a better rate.

When Late Payments Turn to Missed Payments

Any payment a lender doesn’t receive by its due date is considered a late payment. If you pay the minimum amount due by the payment due date, you can avoid a late fee. But if you don’t, your late payment can turn into a missed payment.

The following timeline outlines what happens over time when you don’t submit a payment to a credit card issuer by its due date:

• Days 30-59: You may be charged a penalty APR, and your issuer will report your late payment to the credit bureaus, which impacts your credit score. You’ll also likely be charged another late fee at this juncture.
• Days 60-179: Your account may be closed and sent to collections agencies, and you’ll continue to be assessed late fees.
• Days 180 and onward: Your account is considered in default and will be closed and likely sent to collections. Your issuer may also sue you to recover the funds you owe. 

Missed payments on loans lead to a similar series of events:

• Days 30-89: Your actions, or lack thereof, will be reported to the credit bureaus, damaging your credit score. You’ll be assessed a late fee at the 30- and 60-day marks.
• Days 90-119: Your account will shift from delinquency status to default, and the impact to your credit score will intensify.
• Days 120 and onward: Your account will be charged off and sent to collections agencies, furthering the harm to your credit score. You could also face more severe penalties, such as being sued, having a lien placed on your assets, and having your wages garnished.  

You’ll note that “fees” is a four-letter word, and many consumers have probably muttered a few more of those when charged late fees.

You can take steps to help yourself make payments on time, which may cause you to shout a different four-letter word — “neat!”

Set Up Up Automatic Payments

Automatic payments remove the burden of having to remember when to pay your creditors. Many services, including online bill pay, allow you to set up payments to vendors in advance of due dates. 

Always ensure you’ll have adequate funds in your account prior to the date the payment is sent to avoid overdraft charges — another type of fee.

Set Reminders and Pay Before Your Due Date

In the old days, people tied a string around their fingers to remind them of something important — or so I’ve heard. Life in the 21st century has spared us of this peculiar fashion faux pas. 

We can set calendar reminders and use apps to remind us of approaching payment due dates.

You can also submit payments to creditors well ahead of due dates.

Contact the Lender or Issuer if You Know You’ll Be Late

One of the best moves to make when you anticipate missing a payment due date is to immediately contact your lender.

They may be able to connect you with resources to help you avoid missing future payments. Your lender may also adjust your due date to give you more time to pay. 

No one likes fees, outside of those who profit off them. Some lending fees may be unavoidable, like foreign transaction charges and fees for cash advances or balance transfers. 

But late fees are completely avoidable. Knowing is half the battle, and your knowledge is weighty after being educated in this study of “What is a Late Fee?”