Welcome to the new normal of $40 for late fees for missing your credit card payment due date. Over the past two years, the nation’s top issuers have been nudging late fees up from $35 to $40. Under current, non-existent credit card regulations, the “sky is the limit.” Indeed, credit card issuers are only limited to what the “market will bear.”
With an implied gross profit margin over 90%, late payment fees have become an important component to card issuer’s bottomline, notes Robert McKinley, chief analyst for CardTrak, CardFlash, CardData and CardWeb. Moreover, U.S. credit card penalty fee income topped $12.0 billion in 2020, a slight increase over the previous year, according to RAM Research.
Americans do not compare credit card offers by looking at the late fees disclosed, as they rarely shop bank checking accounts for rejected payments or overdraft fees. However, such fees can be a real nuisance for credit cardholders or a complete financial disaster when checking/debit account fees cascade.
Late Fees Ruin Family Night
A married mother of five, managing a paycheck-to-paycheck budget, remarked the $35 or $40 unexpected fee for a small oversight, eliminated a planned McDonalds family night out. A married father of two, regularly wrote small checks for cigarettes at a convenience store, racking up over $1,000 a month in bank OD or NSF fees.
Today, the most dangerous card for your financial health is a debit card. With a credit card the purchase is denied when you reach the credit limit. With bank account-linked debit cards, a small purchase is gladly approved since it triggers a nasty overdraft fee without any prior warning.
Late Fees in the Day
Nearly 40 years ago, while bank credit cards were in their infancy, the top U.S. issuers charged a modest $5 or $10 late fee with a five day grace period. Citibank, in 1985, would assess a $10 late fee if the cardholder missed the due date by 15 days. Furthermore, over-limit fees were non-existent with most issuers, including Chase and Bank of America, permitting cardholders to exceed their credit limits by 5% to 10%.
This was during the period when the nation’s top issuers were just introducing an upgraded card, the Gold Visa or Mastercard Gold, and nearly all of the top ten banks charged a fixed 19.8% interest rate, a $15-$20 annual fee, and a full 30-day grace period. At that point banks were constrained by some state regulations, setting maximum rates and limiting fees.
The importance of other ancillary fees, including punitive fees such as late fees and over-limit fees, did not take hold until the early 90s when non-bank competition emerged from AT&T Universal Bank, Household Bank and GE Capital. The, Discover card, with limited acceptance but with no annual fee, set the stage for the introduction other AT&T Universal card (1990) offering no-annual-fee-for-life, and the GM Mastercard (1992) offering variable interest rates and no annual fee.
As a result, the top Visa and Mastercard issuers began to roll-back annual fees and took a closer look at other fees. Seeking regulatory shelter in Delaware and South Dakota, big issuers were able to offer uniform pricing across the U.S., without regard for state limits.
Late Fee Hair Triggers
Today, late fees have soared to the point where they are assessed at precisely 12:01 AM on the due date. Synchrony, the largest issuers of retail credit cards, will post the late fee first then credit any payments received on the due date. They will automatically credit the late fee back 24 hours later, but it does lower the available credit for the user for one day.
Best advice for consumers is to make the minimum payment due as soon as the current statement is issued. Then make a second larger payment before the closing date or next statement date. The closing or next statement date usually runs two to seven days after the current payment date. This will free you of any anxiety and avoid getting caught in the late fee trap.
Sources: Chase; Citibank; Bank of America; Capital One; Discover; American Express CardData; RAM Research; CardTrak; CardFlash; Cardworthy; CardWeb; PYRPTS; CardBuzz; Bankcenter; PYVNTS; Ruebud Media; Red3 Media; Robear’s List