Despite new protections, 1 in 5 consumers gets tripped up by a late fee. We explain the fine print you need to avoid them
Credit card late fees aren’t as bad as they used to be, but there is still a lot of costly confusion about the rules.
Before the Credit Card Accountability Responsibility and Disclosure (CARD) Act that went into effect in 2010, many consumers got zinged by bank actions designed to generate late fees — for example, ever-changing payment due dates, a short window of time to pay and midday payment posting cutoff times.
The law’s rules fixed those issues. In fact, a report released in December 2015 by the Consumer Financial Protection Bureau shows the CARD Act rules helped consumers avoid $7 billion in late fees.
However, many consumers still run into late fee troubles: In any three months, 1 in 5 consumers pays a late fee, according to the CFPB — down from 1 in 4 before the CARD Act. Payment problems continue to be the main credit card issue consumers complain about.
Many consumers who complain about payment issues mention “surprise late fees” due to payments not being posted on the day they’re made, according to the agency.
Late payments stay on your credit for a long time, and that can do way more damage than a $25 late fee.
|— Rob Berger|
Founder, Dough Roller
This is partly due to payment cutoff times, which still trip up some consumers despite the changed rules, says Joe Valenti, director of consumer finance for the Center for American Progress, which keeps tabs on credit card policy. “It can be confusing,” Valenti says.
Cutting it close: What is an on-time payment?
If you sometimes wait until the last minute (or the last few days, if you’re sending a check by mail) to pay your bill, you should know exactly what constitutes paying late. (See also “How to avoid (or deal with) late fees.”)
The CARD Act changed late payment and late fee rules in three major ways:
1. Card issuers have less leeway in deeming a payment late. For example, credit card companies can no longer count a payment as late when it arrives before normal close of business on the due date. If you pay by 5 p.m. on that day, in the time zone where the card issuer processes payments, your payment is on time. (There’s a loophole for payments made in person where the branch closes before that time, though.) However, you can’t just look at your own clock and pay at 4:59. You must know the time zone where the payments are collected, which is often, but not always, Eastern Time, says Rob Berger, founder of the personal finance site Dough Roller. “That can really trip you up, especially if you’re traveling,” Valenti says. Banks also may set later cutoff times, giving you more time to pay, so it’s a good idea to check, Berger says.
If you pay by mail, and the payment arrives on a day when the carrier doesn’t receive or accept mail, it must be counted as on-time even if it’s received the following day before the cutoff time, according to the CFPB. So, if your payment is due on a Sunday, and the issuer gets it Monday, it’s not late.
2. Payment due dates must be consistent. Credit card companies can no longer switch the due date around, like an ever-moving target the consumer must hit. In fact, CARD Act rules require the payment due date to be the same day each month. The card issuer also must give you plenty of time to pay: Statements must be sent at least 21 days before the due date and must contain a warning that a failure to pay on time will trigger a late fee. However, that doesn’t mean you’re stuck with the due date the bank chooses. “If your bill is due on the 13th every month and that’s a real pain because it’s two days before payday, call the bank and they should change the date,” Berger says.
3. Late fees must be reasonable. If you do pay late, the card company can charge you a “reasonable and proportional” late fee, according to CARD Act rules. Fees were capped by federal regulations and are amended yearly to adjust for inflation. For 2016, credit card late-fee caps were set at $27 for the first late payment and $37 for subsequent ones.
Issuers also cannot charge multiple fees per transaction. For example, if a cardholder’s payment is both returned and late, the issuer cannot charge both types of fees.
Most banks also limit late fees to no more than the amount of the minimum payment due, according to the report. Issuers can, however, impose a late fee of up to 3 percent of a delinquent balance if a cardholder hasn’t made a minimum payment for two or more billing cycles.
Also, be aware that late fee information may not be noted the same way in all card terms, says Chi Chi Wu, attorney for the National Consumer Law Center. “It may just disclose the higher amount on the statement — “up to” a certain amount — and not the lower, first-time-offender charge,” she says. That’s not wrong, just not totally clear. Check your card’s terms for the most accurate late fee information. If you are still unsure what fees you may face, call your issuer.
Business cards’ fees not subject to federal rules
If you are a business credit card holder, you may need to pay extra close attention to late fee terms. Business cards aren’t covered by the same CARD Act protections as consumer cards.
This means business card late fees may be higher than those of consumer cards. For example, a card fee survey conducted by CreditCards.com in June 2015 found some business cards charge late fees up to $49.
To avoid any late fee surprises in the event of a late payment, read the terms of your specific card to understand the fee guidelines. Again, if you have questions, call your issuer.
Additional reporting by Sienna Kossman.
See related:5 ways to avoid (or deal with) late fees