A $5 late penalty from your phone company here, $2.50 for overdue library books there. It's easy to forget that late fees really do add up, and avoiding them is more than just a way to save a few bucks. If you're living paycheck to paycheck, or just have the sense that your money should be going a little further, avoiding late fees can almost be a full-blown financial strategy.
For those who haven't thought a lot about late fees, here's more than you probably ever wanted to know.
Why late fees are charged. As you suspect, companies do it because they can. "You are most likely to be charged a late fee by a firm that does not have serious competition for your business," says Rick Scott, an assistant professor of finance at Saint Leo University in Saint Leo, Fla. He cites the usual suspects: mortgage, rent, utilities, government services, car loans and credit cards. The latter do it, Scott says, knowing that "if you can't pay them on time, you are unlikely to be able to get another card."
[Read: How to Avoid the New Bank Fees.]
How late fees can add up. If you habitually pay bills late and shrug off late fees as a cost of living and staying afloat, consider what a hefty price you're paying. As a general rule, most businesses charge anywhere from 10 to 15 percent of the monthly bill for a late fee. If you pay, say, $2,500 a month in mortgage or rent, a car loan, electric and other utilities, you could easily be spending $2,750 with late fees but budgeting to spend $2,500. No wonder you're behind.
Late fees are most damaging with credit cards. Late fees can really pile up if you have a lot of credit cards, says Gail Cunningham, a spokesperson for the National Foundation for Credit Counseling. She puts it this way: "The average consumer who comes to the NFCC for financial counseling has six credit cards. If they can't make at least the minimum payment on time, that comes out to 6 times $35 equals $210." Every month. In late fees.
Put another way, "if a credit card holder with a $1,000 average monthly balance is late three times a year, and pays a late fee of $35 each time, his or her effective interest rate increases by at least 10.5 percent. This is on top of the quoted interest rate charged by the card issuer," says Donna Dudney, an associate professor of finance at the University of Nebraska-Lincoln.
Wait, it gets worse. "Late payments are reported to the credit bureaus, which will adversely impact your credit score. Even one late payment can decrease your score and affect you for months and even years," says Katie Ross, education and development manager of American Consumer Credit Counseling, a nonprofit headquartered in Auburndale, Mass.
And if you miss one payment - or certainly more than one - you'll generally find your interest rate hiked, "which would be disastrous if you are living on a very tight budget," Ross says.
She adds that if a credit card payment is more than 30 days late, your late fee problem may show up on your credit report and remain there for the next seven years. That, of course, will affect your credit score, which affects the interest rate on car loans, mortgages and future credit cards.
With credit cards, there is another late fee trip-wire to consider, especially if you're someone who consistently makes minimum payments, warns Katie Moore, a Detroit-based financial counselor with GreenPath Debt Solutions, a nationwide nonprofit that helps consumers with credit card debt, housing debt and bankruptcy.
Sometimes late fees can take a chunk out of your monthly minimum payment, Moore says. "For example, your minimum payment on a credit card with a $1,000 balance might be $40. If you pay it late, a $25 late fee may be applied. The problem here is if you paid $40 and $25 is applied to the late fee, only $15 of the $40 payment is applied to the principle and interest."
Meaning? Someone who pays a credit card bill late every month, and only pays the minimum, is paying almost half of their bill to late fees.
How can you avoid late fees? You have several options.
-- Look for a bank or credit card that promotes no late fees. There are a few out there, as some credit cards and banks are realizing they might be able to attract customers by getting rid of late fees. For instance, Citi Simplicity is the only credit card, according to Citi Simplicity, that never charges late fees, penalty fees or an annual fee. So what happens if payments are never made? A company spokesperson who didn't want to be identified said information would eventually be sent to the credit bureaus - so no late fee doesn't mean never make a payment, but if you continually miss the deadline, there is no fee and the interest rate won't rise.
[See: 8 Painless Ways to Save Money.]
-- Talk your way out of the fee. Sure, everyone suggests this, but Gary Frisch, a public relations professional and regular bill payer in Laurel Springs, N.J., takes the advice to new levels. "I've called as many as three times before finding someone who will credit me the fee. Or speak to a supervisor, and stress your loyalty and long history as a customer or card holder," Frisch says, but he adds: "Threatening to cancel your card usually does no good, because the rank-and-file rep or supervisor probably doesn't care, and once you go down that route, you might be cutting off your nose to spite your face."
-- Set up automatic withdrawals. But be careful. If you're living paycheck to paycheck, you could easily find yourself in overdraft at the bank, which can be even more expensive than a late fee.
-- Always pay everything on time. Well, that is one way, yes.
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