Late fees fluctuated between $5 and $10 in the mid-1980s when the credit card business was about to explode. Most of the ten largest issuers charged a 19.80% APR and a $15 to $18 annual fee. For credit card issuers the late fee was not a significant part of the revenue stream, as it was dwarfed by interest income and annual fee income.
Banks would commonly not assess a late fee until the closing date or about five days after the due date. One the nation’s top five banks, Citibank, offered a 15-day grace period before they would charge a late fee.
Late Fee Evolution
However, things changed in 1990 when the AT&T Universal Visa and Mastercard was introduced with no annual fee for life and a lower interest rate. Two years later GM Mastercard entered the market with an even lower, variable interest rate. In the same month, September 1992, the GE Mastercard released another competitive credit card product. Both cards sent shockwaves through the U.S. credit card market, notes Senior Analyst Robert McKinley.
So with competition driving the annual fee out of the market, there was pressure to boost income with other fees. As a result late payment fees rose to near the $20 level, or what banks perceived as the highest rate cardholders would tolerate. Also, over-limit fee began to surface.
Ten years ago, over-limit fees were driven from the market by regulations and now late payment fees are now approaching the $40 level. Additionally, the grace period to assess the late fee after the due date stopped years ago and function on a hair-trigger.
Investment banker and card industry expert R.K. Hammer estimates penalty fee income in the U.S. market hovered around $11 billion in 2019. There is a consensus more than 80% of the figure is late payment fee income.
For the last several years early stage credit card delinquency (30+ days late) hovers around 2% to 3% of credit card loans. The percentage of cardholders between one day and 30 days late is roughly four times higher. Robert McKinley notes if a bank has a million cardholders and levies a $30 late payment fee it is very likely they are raking in close to $2.5 million per month on late payment fees, with a profit margin exceeding 95%.
Avoiding the Late Fee Trap
The vast majority of American consumers, especially young, tightly budgeted or paycheck-to-paycheck families have found themselves in the position of which bills to pay first. A $38 credit card late payment fee, like bank overdraft fees, are devastating.
How do you avoid getting caught in the late fee card trap?
Professor Cardworthy, the “Money Explainer” offers four ways to stop this from happening to your family as well as save more than just a fee.
- Always Pay Well Before the Due Date, as Soon as Possible, to Make a Late Fee Not Possible
- Make a Second Larger Payment a Week (or Two) But No later than the Closing Date (usually 2-5 days after the Due Date) to Reduce Balance and Interest. Better Yet Pay-Off the Entire Balance Before the Due Date and Eliminate Interest Charges.
- If an Option, Change Your Due Date to a Date that Works Best for You (Timing it with Your Pay Cycle or Moving it Away from the End of the Month when You are Trying to Make a Rent ot Mortgage Payment.
- Signup for Account Notifications through the Banks App to Remind you of Due Dates, Balance, Available Credit and/or Real-Time Activity Notifications.
One note, some issuers limit how many payments you can make during a billing cycle, so making weekly payments on a credit card may not work.
Professor Cardworthy also reminds you to not confuse making a late payment fee with being reported to the credit reporting agencies as a “late payer” or “delinquent.” You are not considered delinquent if you are less than 30 days late. This 30-day period usually starts with the missed payment date, but there are a few banks that start the 30 day window from the closing date.