Chronic Late Credit Card Payments: How Bad can Fines, Fees Get?

Even the most conscientious among us occasionally botch making a credit card payment on time. But if you let it happen a second time, don't expect your card company to go easy on you.

Easing the pain for first-time late payers was one of the goals of the Credit CARD Act of 2009, which included a "safe harbor" benchmark for a "reasonable and proportional" late fee, capped at $25 for a first offense (down from a pre-Act average of $39). While a late payment can still earn you a much higher penalty interest rate, the CARD Act dictates that you be given 45 days' notice of the change and that the higher rate applies only to new purchases, allowing you to either close your account or swipe another card when you shop.

But the situation isn't quite as comfy for habitual late payers. Consider language in Regulation Z, a 2010 addendum to the CARD Act, which explains that late fees are capped at $25 unless "the consumer has engaged in repeated violations."

When stepped-up penalties apply That doesn't give card issuers leeway to throw you to the wolves, but it does allow banks to adjust penalties for chronic or severe late payers, generally considered cardholders who:

have paid late more than once in a six-month period
have paid more than 30 days late

For instance, if money is tight and you make a late payment in January, then pay late again in March, your bank can hit you with a higher fee on the second offense, generally $35. And it'll be $35 for every late payment from there on out. (See chart below for examples of late fee policies from major card issuers.)

The penalty interest rate is also more stringent for repeat offenders. Pay late once, the higher APR applies to future purchases. Pay late twice in a six-month period, and the penalty APR will often apply to existing purchases, which can dramatically increase your minimum payment.

Fees multiply Ignoring a credit card bill doesn't just earn you one late fee, but multiple. For example, if you ignore your minimum payment, you'll win a $25 fee. After 30 days, you'll get hit with a $35 fee, and another $35 fee after 60 days, and so on at the end of each billing cycle. Each fee gets added to your minimum payment, and eventually the penalty APR kicks in, skyrocketing your costs.

Are so many late fees in a row unfair? Not according to Nessa Feddis, senior vice president of consumer protection for the American Bankers Association, who explains, "The idea is to give people an incentive to pay. It's like a parking ticket. If you can only impose one parking ticket till the car moves, why not just park it there for the week?"

By letting you rack up more -- and heftier -- fines, your credit card issuer hopes you will, in effect, "move your car."

Why banks are charging you Late fees can seem like just another way for your bank to gouge you -- particularly when your payment is only a few days late. Feddis explains that late fees are "intended to recover some of the costs that are associated with people who pay late -- most of the customer service costs, as well as the risk they will not repay the debt." Even in an era of automation, recouping an overdue payment often requires actual staff time, which means paying a customer service rep.

In fact, Regulation Z of the CARD Act allows card issuers to charge more than the traditional $35 fee if "the issuer can show that a higher fee represents a reasonable proportion of the costs it incurs as a result of violations." As a practical matter, card companies haven't tried to increase their fees to make up for higher collection costs yet. But it could happen in the future. "If [the issuer] can prove it costs $45 in 2016, and $35 is just not reasonable, then the regulator could say, 'OK, you can charge that, you have an exception based on your actual costs,'" says Ruth Susswein, deputy director of national priorities for Consumer Action, a Washington, D.C.-based consumer advocacy group. "That was the concept -- that if their costs outweighed this fee there should be a way for them to recover it."

More good reasons to pay on time Frequent or severe late payments don't just land you with higher fees and interest rates, they can cause long-term damage to your credit score, since FICO gives your payment history more weight (35 percent) than any other factor in determining your score. A fumbled payment that's just a few days late won't show up on your credit report, but once you're 30 days late (and beyond), your card company will report it to the credit monitoring bureaus. The later your payment, the bigger the black mark on your credit rating.

But a series of even slightly late payments can show a pattern that makes your card company cringe. "In the eyes of my credit card company if I don't pay [the bill] by my due date I'm late," says Patrick Ritchie, author of "The Credit Road Map." "If I'm continuously past due, even if I never reach that 30-day limit, eventually my credit card company can say, 'They've become high risk.' If they think I'm having problems, even if they like to receive those late fees, they'll likely decrease my available credit." And since the amount of available credit you have factors into your FICO score as well, expect your score to take a hit if your card issuer lowers your spending limit.

Another small reason to pay your bill on time: Some card companies, including Capital One, won't let you earn rewards on transactions if you paid the bill for that cycle late.

Protecting yourself from yourself As much as you'd like to rail against your card company for being so quick to slap on a fee, let's face facts: Paying a bill on time is just one of those grown-up responsibilities. So if you've made a late payment, focus on how to fix the situation and, more importantly, keep it from happening again.

Ask for leniency. "When someone does make a late payment, if they're generally in good shape, it never hurts to call and ask to have it removed," says Ritchie. Simply say you paid late because of an oversight, and because of your long-standing stellar history of on-time payments, you'd like them to waive the fee. (If they won't, you can threaten to cancel your card, which might yield the desired result.)
Opt for a card without a late fee. If you know you've had problems paying on time in the past, why tempt fate? Consider Citi Simplicity or American Express Clear, two cards that don't use late fees. (But read the fine print: the AmEx card can still invoke a penalty APR.) Or consider a Wells Fargo card, since the bank stopped using penalty APRs in 2010 -- although chronic late payers could find their credit limit cut or their account closed.
Monitor your interest rate. According to the CARD Act, your issuer should revoke your penalty APR after 6 months of on-time payments -- but only when the higher rate was applied to your existing balance after multiple late payments. You may be stuck with the higher interest rate on new payments. In any case, some issuers like American Express spell out in their cardholder agreement that they "will review your account every 6 months after the penalty APR is applied," while others boldly state that the penalty APR will apply "indefinitely." If you've worked hard to keep your record clean after a few missteps, call your card company and ask them to lower your rate.
Set up automatic payments. If bills simply slip your mind, enroll in your card's auto-pay program, so you'll never have to scramble to send money.