How early payment can result in late fees
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Dear Speaking of Credit,
With the birth of my grandchild quickly approaching, I knew I was going to be out of town when my credit card statement would arrive. My payment was due on the 20th of the month. I made my August payment on Aug. 7. Before I left I made another payment on Aug. 28 for my September payment. When I received my October statement, it showed I made no payment for September but two payments for August even though my due date was Aug. 20. I was charged a $25 late fee and an additional payment penalty for nonpayment. Is this legal? -- Cathy
Congratulations on becoming a new grandmother! Sorry the happy occasion had to be tarnished by one of the more confusing practices among card companies that came about many years ago: the addition of the "payment due date." I'll provide a little background on how payments on revolving accounts work, some details as to what I believe may have happened in your situation, and how you can avoid future repeats.
And I'll begin by saying yes, it's all legal.
If you're one of us baby boomers or a little younger, you may remember when card bills contained a single date that was both the closing date for the current statement and the date your payment was due each month. For example, if your account's statement closing date was the 20th of one month, your payment would be due on the 20th of the following month. Simple as that.
Then a number of years ago the card companies came up with the payment due date, which, while leaving the billing cycle -- when payments, charges and all other credits and debits are posted to an account -- at the traditional 30-day length, served to shorten the amount of time available for paying the bill by anywhere from three to 10 days, depending on the card company. With this change, any payment made after the payment due date is now considered late, typically resulting in a late fee and in some cases when occurring repeatedly, a delinquency added to the consumer's credit report.
To give you an example of how this works: If the payment due date is the 20th and the closing date is the 30th, a payment made on the 19th is on time, but one made on the 21st is late -- despite payments of either date appearing on the statement of the 30th.
But what does this mean for a second payment made before the closing date, yet after the payment due date, as was your experience back in August? Will it apply as a payment for the following month, as you had hoped, or simply be treated as an additional payment within the same month?
Unfortunately, in order for that second payment to count as next month's, it would have to post sometime after the current month's closing date and on or before the next payment due date. Otherwise, as in your situation, posting between the due date and the soon-to-follow closing date will cause the second payment to be considered nothing more than an additional payment for that month -- leaving another payment remaining due by the next due date.
Unlike mortgages and other installment loans, where additional payments made in one month can be applied to future months, revolving accounts (cards and lines of credit) not only require at least a minimum payment for every billing cycle in which there is a balance, but also that those payments are made between the closing date of one month and the payment due date of the next -- often a window of as few as 20 days.
As a way to avoid any future such occurrences when away from home for an extended time, or simply as a way to ensure against forgetting to pay, you may want to try out automatic bill payment (autopay). You can set up automatic payments in a couple of different ways:
- On your bank's website, set up a schedule for funds to be sent from your bank to your creditors.
- Create an autopay account at each of your creditors' websites, allowing each to withdraw funds from your bank when payments are due.
Both methods tend to be safe and convenient, with each having its pluses and minuses.
For paying multiple accounts and maintaining all payment records at a single source, using your online bank site to schedule future payments may be the way to go. One drawback to this method, however, is that there is no way for your bank to know the amounts of these bills or when they become due each month, so you will have to specify exactly how much is to be paid and when for each account each month.
While having to go to different websites to set up autopay systems for multiple accounts can be tedious initially, a big advantage to this method is that each card company will have all of your account information -- balance, minimum payment, due date -- which means you can, just once, simply check the boxes as to whether you'd like the minimum payment, full balance or a fixed amount (set by you) withdrawn from your bank when due each month. You can also indicate if payments are to be made on an ongoing or one-time basis, and how many days before the statement date you'd like the payment made each month.
Of course, you can't forget about paying bills entirely with automatic bill pay. You'll always want to make sure to have the funds available at your bank when the payments hit, or you may incur a late charge and delinquency with the credit card company, and also an overdraft fee from your bank. Fortunately, such lapses can be easily prevented with both methods of automated bill pay providing email notification before and after payments are made.
I hope that knowing what you now know about minimum payment requirements and payment due dates -- and having at least one solution -- will help enable you to spend more time with your new grandchild and less time worrying about paying bills. Good luck!
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