A Late Charge

A late charge is the fee charged by lenders, banks, or credit card companies when payments are made late. Late charges are an additional expense added to the monthly amount that’s past due.

What Is a Late Charge?

Late charges, also called late fees, are dues typically associated with loans or credit cards. However, you may be charged a late fee for missing a rent or cell phone payment as well, among other things. Late charges incentivize borrowers to pay their bills on time and provide additional income for businesses.

Late charges must be clearly outlined when entering into a contract with a business or lender. If you can’t find information on late charges, speak to a customer service agent. 

Some financial institutions do not have late charges and advertise this information to get more customers. But even if there are no late charges, it’s still beneficial to pay on time to avoid dips in your credit score.

How Much Is a Late Charge?

If you miss a payment, the cost of a late charge will depend on the lender. But late charges typically range from $25 to $50. Each additional late charge after the first is either the same amount or more costly, depending on the repayment terms.  

Late charges should be clearly stated in the contract or lease agreement. The cost of a late charge may increase during repayment, but know that you are legally required to be informed of these changes. A late charge may not seem like a lot of money, but that’s money you could be spending on activities you enjoy.

In some instances, lenders offer a grace period if a payment is made within a day or two. If you have not missed a payment, some financial institutions may not charge you for the first late payment. Keep in mind that you may dispute late charges with lenders. Having pristine payment history can be used as leverage to get the first late charge waived.

Financial circumstances may also change unexpectedly. If you become unemployed and can’t pay bills, consider adding a cosigner or co-borrower to your agreement or talking to lenders about refinancing. A refinanced loan could offer lower monthly payments that are less stressful to pay.   

Negative Effects of a Late Charge

One late charge may not be detrimental to your finances, but multiple late charges can negatively affect your bank account and credit score. Late charges vary based on the lender, but these charges can quickly stack up. If your credit card has a $30 late charge, and you miss two payments, that’s $60 you didn’t have to pay.  

A missed payment can also negatively affect a credit score by a few points. A FICO credit score is calculated based on these five factors:

  • Payment History
  • Total Debt
  • Length of Credit History
  • Credit Inquiries
  • Credit Mix

Each category is worth a certain percentage of your overall score. Payment history is the most important category, accounting for 35% of a credit score. One late charge may lower your credit score by a few points, but multiple late charges can lead to delinquency or default.

Delinquency occurs when a borrower misses a scheduled payment for certain loans, such as credit cards. An account is labeled delinquent until the borrower pays the late loan amount and any late charges. If financial delinquency is a repeated offense, a borrower can fall into default.

Default is a severe financial state that signifies the borrower has failed to meet the contractual obligations. A default can result from multiple late charges. Default negatively affects a borrower’s credit report, which is reviewed during a credit check. This can make borrowing finances in the future difficult.

Lenders typically shy away from risky business deals. They may point to default as the reason for ineligibility, though some loans have no credit checks. Credit checks are often tied to rental applications, so you could risk losing your dream apartment with numerous late charges.

A late charge can be a pain to pay, but multiple late charges are detrimental. Staying diligent about payment due dates is the key to maintaining a stable financial history.

How To Avoid a Late Charge

The best way to avoid a late charge and damage your credit score is prevention. And once you successfully prevent late charges, you can start becoming more financially independent.

Most financial institutions offer automatic payments, so you don’t have to manually pay bills every time. Suppose you have multiple bills to worry about each month. In that case, you could sign up to have the money automatically deducted from your bank account. Some lenders may even offer a small deduction to your monthly loan amount just for signing up for automatic payments.

If you prefer to pay bills manually, ensure you add reminder alerts to your calendar. To avoid cutting it close, set a payment reminder a few days sooner than the actual due date. Paying as soon as possible is key to avoiding a late charge.

If the due date for a bill falls inconveniently before your payday, call your lender to request a later due date. Keep in mind that this may require you to pay twice within one month. For example, if your due date falls on the fifth of the month, and you request to pay the twentieth, then you may need to pay both dates. Saving up for this change can be inconvenient but worth the peace of mind knowing you will receive enough money to cover the cost of future payments.

References:

Investopedia: Late Fee Definition
How are FICO Scores Calculated? | myFICO
Investopedia: Delinquency vs. Default: What’s the Difference?

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