Late fees for not paying a credit card on time, perhaps not surprisingly, create the biggest hardships for consumers who can least afford to hand over more money.
And unfortunately, too many people who might qualify for getting that first fee waived never even realize that they can ask their credit card issuer for a break.
Credit card holders paid more than $14 billion in credit card late fees in 2019, according to a new study by the Consumer Financial Protection Bureau.
But those fees declined to around $12 billion in 2020 as some consumers used stimulus cash to try to pay off their debt and financial institutions offered some COVID-19 relief.
As the economy returned back to normal, experts said the volume of credit late fees saw an uptick in 2021, too.
The first fee for a late credit card payment on average is around $26 a pop, the CFPB report noted.
After that first late fee, the average fee on a late credit card payment jumps to $35 on general purpose credit cards for each subsequent late payment within six billing cycles.
For those struggling to pay their bills, one late fee can lead to another and then trigger an even higher fee down the line. And then, you're looking at some real trouble.
Those with ultra low credit scores on average could end up spending nearly $140 a year on average in late fees for a credit card, based on the watchdog agency's research.
While $140 might not seem like a lot to many, it compares with an average of just $11 among consumers with excellent credit. Those with excellent credit often avoid paying late.
And consumers with the lowest credit scores often have two credit cards, the CFPB noted, which could end up triggering up to $300 in fees in a year if repeated late payments took place with each card.
"For credit card companies, especially private label and subprime specialist issuers, late fees continue to bolster their bottom line," the report noted. Private label credit cards are those issued for use at specific retailers.
A string of late fees can add to the overall cost of borrowing and drive up what you're really paying to pull out a credit card to buy groceries, gas or other necessities.
Remember, a $35 repeated late fee each month applies whether the consumer is carrying a balance of $500 or $5,000 on that credit card.
"As consumers in poorer areas tend to carry smaller balances when they are late on a payment, the late fee they pay on top of a finance charge is typically a larger cost relative to their average daily balance," the report noted.
Even during the pandemic, late fees accounted for 10% of the $117 billion consumers paid in credit card interest and fees in 2020, according to the CFPB report.
Late fees can vary — and how much people pay can reflect their ability to pay their bills on time.
Some states saw the average credit card accumulate almost $30 in total late fees in 2019, while in other states saw an average below $20.
Michigan overall is among the states with lower costs. The average credit card accumulated $20 to $21 late fees in Michigan in 2019, according to the CFPB report.
Consumers in southern states paid substantially more on average per account, possibly due to a higher share of accounts paying any late fees in a given month or a greater number of accounts incurring higher repeat late fees.
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Louisiana, Alabama and Mississippi hit the highest average at a range of $25 to $29 in 2019, according to the CFPB report.
Lower income families have a tougher time making ends meet, as they live from one limited paycheck to the next. And they're more likely to face such fees if they're making a choice between being late for the rent, the car payment, or the credit card.
The CFPB report indicated that credit card late fees disproportionately burden consumers in low-income and majority-Black neighborhoods.
"When we link the ZIP code of a cardholder’s residence to census tracts, we find other signs of the unequal burden of late fees," the report stated.
For example, the report noted, credit card holders in areas where a majority identified themselves as Black in the 2010 U.S. Census paid more than $25 in total late fees for each account they held with major issuers in 2019.
"The overall credit card market continues to rely on late fees disproportionately paid by economically vulnerable consumers," the report noted, adding that a small percentage of companies charge no late fees or offer other relief.
The Consumer Financial Protection Bureau announced in January that it would be putting hidden fees, exploitative income streams and anti-competitive financial practices under the microscope.
The theory is that financial institutions can ultimately obscure what consumers actually pay when selecting a specific mortgage, bank account or credit card by highlighting an attractive offer but then charging inflated, back-end fees.
The CFPB is seeking feedback about unexpected fees and related issues through April 11 that can guide the agency as it makes new rules and works with other banking regulators to spur transparency and competition.
More than 25,000 comments were received through mid-March, which the CFBP says shows the "high-level of public interest on this topic, and the number of people affected by exploitative junk fees." As a result, the original March 31 deadline was extended.
Comments need to be identified by "Docket No. CFPB-2022-0003" in the subject line and can be sent by email by to FederalRegisterComments@cfpb.gov.
For consumers, it could pay to shop around and look at the late fees charged, as well as the promotional rates being offered.
Most smaller banks and credit unions charge a maximum late fee of $25 or less for credit cards, the report noted.
By contrast, almost all of the largest credit card issuers are near the higher fee amounts that are specified by regulation.
A late fee for a credit card in 2022 can range up to $30 for the first-time offense. Then, the subsequent fee can be up to $41 for additional late payments made within six billing cycles. (The maximum regulated fee is adjusted each year for inflation.)
CreditCards.com surveyed 100 popular cards in late 2020 and then only found two — the Apple Card and the Citi Simplicity Card — that never charge late fees, said Ted Rossman, senior industry analyst for CreditCards.com and Bankrate.com.
To be clear, he said, you still have to make at least that minimum payment even if no late fee is charge. Consumers face major consequences if they don’t pay — such as damage to their credit scores, a higher penalty interest rate and being sued for unpaid debt.
Credit scores wouldn’t be hurt until you're 30 plus days late, he said, and the penalty annual interest rate doesn’t kick in until you’re 60 plus days late.
"It’s important to know that once you hit 30 days late, your credit score will likely take a hit, even if there isn’t a late fee," Rossman said.
The 2020 survey noted that six of the 100 cards surveyed would waive the first late fee for all customers. Discover, he said, still has an official policy that the first late fee is waived.
Experts note that many credit card issuers will waive late fees on a one-time basis but you do need to ask.
In 2020, Bankrate.com found that 82% of credit cardholders who asked for a late fee waiver got at least some relief either all fees waived or some fees waived.
The problem? Only 47% of those who paid late even asked for a break on fees, Rossman said.
Millennials and parents with children under 18 are the groups that asked the most and were the most successful in getting fees waived, according to the Bankrate.com survey.
The Bankrate.com survey indicated that 33% of cardholders were charged a late fee in 2020.
"You’re most likely to get out of a late fee if it’s an isolated event and you’re a good customer otherwise," Rossman said.
"In my experience, most credit card companies will waive the occasional late fee, but don’t make a habit out of it," Rossman said.
"Just be honest. If you’ve been with the bank for years and always paid on time but slipped up last month because you forgot, you were traveling, you were in the hospital, whatever it is," he said.
Explain your situation. Be pleasant. Say you'd appreciate a break. And then tell the credit card issuer that you will take steps to ensure that it doesn't happen again. You may want to consider an automatic payment program or setting up payment alerts where you can be texted to remind you that a payment will be do ahead.
Know your due date on various credit cards, which is often the same every month.
Your credit card’s due date can be found on your statement.
Rossman said technically, a late fee could apply after just one day late. In practice, though, he said sometimes banks may wait a few days or even a week to assess a fee.
"Some of this gets back to that gray area that everything is negotiable and your mileage may vary," he said.
This article originally appeared on Detroit Free Press: How to avoid late fees on credit cards and improve your credit score
