Sneaky Late Fees: Avoiding the Discredit
NEW YORK ( MainStreet) How well do you know the fine print on your credit card's late fees? What do you think the impact on your credit score is? How can you avoid the late fees trap?
The average number of credit cards per U.S. household is six. In comparison, the figure for Canada is two. Speaking in purely mathematical terms, Americans are three times as likely to have a problem with late fees on their credit card as their neighbors up north! What can we do to even the odds?
The Not-So-Fine Print
A widely held misconceptions about credit card late fees is that the late fee charge as such is the entire penalty. Wrong!
Apart from charging you a substantial fixed late fees, your credit card issuer may start charging a penal rate of interest on not only your outstanding balance but also on new purchases. The typical penalty rate that most banks apply is a massive 29.99% and unlike the late fees, which the Card Act of 2009 puts a cap on, there is no cap on the penal rate. What the Act does do is require that penal rates of interest be removed if the customer has paid on-time for six consecutive months. That is little consolation, though, because the damage would have been done to you by then.
Another worst case scenario about the penal rate is that the bank may decide to apply it on all your credit cards with them, rather than just the one you have defaulted on. Also, cards that advertise no late fees or penalty ratese.g. Citi Simplicity and American Express Clear are only available to people with high credit scores, have a higher APR than on a normal card and include some fine print that specifies the limits of the late fees "holiday."
According to FICO, a person's payment history accounts for 35% of his total credit score, so imagine what late payments will do to your score. Since your credit score determines not only your eligibility but the rate at which loans are extended to you for everything from buying a house to financing further education, you will end up paying a far heavier price in the long run.
Payments that are a few days late do not get reported by the banks, but once it hits the 30-day milestone, you can be sure that the credit rating bureaus have been notified. A single missed payment can drop your score by 100 points. Anything in the 90-day ballpark, and you have irrevocably damaged your credit score for up to seven years.
A 120 day delay in your credit card payment will lead to a bank doing a charge-off assuming that the debt will never be repaid. A charge-off debt is either sold to a collection agency which will come knocking on your door or an internal collection department takes up the task of recovery, and very often these can lead to lawsuits.