What Is a Late Fee?
Let me explain to you what a late fee really is—it's a charge that lenders and companies hit you with when you don't make a payment on time. You could encounter these fees if you're late on a loan, credit card, insurance policy, or even a rental agreement.
These fees are meant to push you to pay by the due date, and they have to be laid out clearly in your contract. If there are any changes to these fees, lenders are required to notify you in advance and in writing.
Key Takeaways
- A late fee is a charge you face if you fail to make a payment by the due date.
- All late fees must be explicitly outlined to borrowers.
- Late fees generally range from $25 to $50, though some may be lower.
- Late fees can increase account balances and can hurt your credit history.
How Late Fees Work
Lenders, such as credit card companies and other creditors, generate revenue through various charges, including late fees. These fees kick in when you don't pay a bill by the specified date. For example, if you miss the minimum monthly payment on your credit card, the issuer might add a late fee to your next statement. Similarly, a landlord could charge you if rent isn't paid on time.
Every late fee must be detailed in your credit card agreement, lease, or contract. Legally, creditors can't impose excessive fees—what's considered reasonable can be debated, but most fall between $25 and $50.
Some creditors offer a grace period before charging the fee. Say your rent is due on the first, but you have until the 10th without penalty—that has to be stated in the lease. Others might waive the fee for your first missed payment, while some charge it immediately, even if you're just hours late.
These fees add to your outstanding balance. On a credit card, it increases what you owe, and you'll pay interest on that fee too.
Impact on Your Credit
Missing a payment can damage your credit history and score, since payment history makes up about 35% of your FICO score. The more payments you miss, the more fees you'll rack up, and your score will suffer.
Late fees can also mess with your credit utilization ratio—the amount of credit you're using versus what's available. Higher utilization lowers your score.
How to Avoid Late Fees and Other Penalties
You can dodge late fees by setting up automatic payments from your bank account, as long as you have enough funds. For credit cards, paying in full each month avoids interest, but at least making the minimum on time prevents the late fee.
Late payments might trigger other charges, like a returned payment fee from the card issuer and an NSF fee from your bank if funds are insufficient. Lenders could also hike your interest rate through penalty repricing, pushing it to a higher penalty APR outlined in your agreement.
Late fees are one of many charges—think annual fees, balance transfer fees, foreign transaction fees, or returned payment fees. Pick your card wisely to avoid some, and follow the terms to skip others.
Cracking Down on Junk Fees
In March 2024, the CFPB announced it would cap credit card late fees at $8, down from an average of $32, estimating $220 annual savings for 45 million consumers. But banks oppose this, and the U.S. Chamber of Commerce has sued to block it, claiming costs will shift to on-time payers.
The CFPB estimates excessive late fees total $12 billion yearly. Under the 2009 CARD Act, fees must be reasonable and proportional, but a 2023 report showed fees up to $41, generating five times the collection costs.
Junk fees appear in other areas too. Some auto lenders charge more than allowed in agreements, like a $25 fee exceeding a 5% cap. Mortgage servicers have done the same, even after promising not to. Student loan servicers might reverse credit card payments taken over the phone, leading to late fees.
If you're hit with a late fee, check your contract to ensure it's not higher than permitted.
Common Questions About Late Fees
How much can a landlord charge for late rent? It depends on state laws—some require it to be reasonable, others limit it to a percentage of rent or a fixed amount.
How long do late payments stay on your credit report? Up to seven years, and they affect 35% of your FICO score.
Does the IRS charge late fees? Yes, it's a failure-to-pay penalty of 0.5% per month on unpaid taxes, capped at 25%.
The Bottom Line
Late fees can be excessive and even illegal, so pay your bills on time to avoid them. Set up automatic payments if it helps. If you're not usually late and get charged, ask the creditor to waive it—they might.
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