Paying a credit card late by just one day can be very costly. Consumers who are carrying a balance must be vigilant about changing due dates, which could snare them into a late payment. Under many credit card agreements, the late payment will cause the loss of a low fixed interest rate to be replaced with a much higher default interest rate. Most people should avoid a late payment on a card with a balance at all costs.
Penalty Interest Rate
When a payment is not received by the due date, many banks automatically charge a late fee which is usually around $35. In addition, some credit card issuers also automatically change the interest rate to a default or penalty rate which is around 29% APR. Some banks may give the borrower one late payment per rolling 12 month period before imposing the penalty rate. The exact terms for the imposition of a penalty rate depend on the borrower's credit card agreement.
Using an actual example of a $10,000 balance at 9.9% APR, the monthly finance charge is usually around $82.50. If a payment arrives one day after the due date, the rate may increase to a 28.9% APR which represents a monthly finance charge of $241. The cost of the $35 late fee is nothing in comparison to just one month's increased finance charge. In most cases, the only way to avoid the interest rate increase is to transfer the balance somewhere else, which itself is difficult in today's credit climate.
In the past, credit card issuers may forgive a late payment by waiving the late fee and the imposition of the penalty rate in exchange for not closing the credit card account. In today's credit environment, the lender may call the borrower's bluff and close the credit card account. Nevertheless, it is always worth it to call the credit card company's customer service, and ask for a waiver of the interest rate increase and late fees.
Credit Card Act of 2009
Starting in February 2010, the Credit CARD Act of 2009 (Credit Card Accountability, Responsibility, and Disclosure Act of 2009) does not allow for increased rates on an existing balance unless the borrower is 60 days behind. Although this means a late payment does not necessarily trigger an expensive rate increase, it will result in higher rates for new balances from subsequent purchases. The act also requires issuers to return cardholders to their original interest rate if six months worth of payments are made on time after the increase, thus possibly limiting the increased finance charges.
Late Payments on the Credit Report
A payment that is less than 30 days old shows up as a "paid as agreed" on the credit report. However, not all news is good. If the minimum payment rises due to an increased interest rate, the debt payment to income ratio will be higher, making it harder for the borrower to get another loan such as a mortgage. The higher amount of monthly debt payments will lower the FICO score somewhat.
Neither the late fee nor the ramifications on the credit report are of much concern. Rather, it is the imposition of the credit card issuer's default or penalty interest rate that makes a late payment so costly. It is best to avoid late payments at all costs by monitoring credit card due dates regularly and making sure payment arrives on time.
Those who may have to make a late credit card payment may want to read about mortgage late payments, which are usually much more lenient depending on the terms of the mortgage and credit card account.
Readers interested in this topic are often also interested in learning about non-ChexSystems accounts as well.
Reference:
MSN Money. "One Late Payment Can Doom You."
US Treasury's Office of the Comptroller of the Currency. "Credit Card Payment and Late Payments."
US White House Press Office. "Fact Sheet: Reforms to Protect American Credit Card Holders."
