If you’re an expat or a business owner in the US, understanding how credit works in the country is essential—and one of the components to be aware of is late fees. These apply to credit cards and any other contracts that involve payment. Lack of awareness of these fees could result in hefty additional charges and other consequences for your financial health.
At Remitly, we’re here to support you in your financial health as you immigrate to a new country. If you’re just starting out in the US, this article will tell you everything that you need to know about late fees, including how to avoid them and what to do if you receive one.
What is a late fee?
Everyone who has ever been on a deadline knows that sometimes life just gets in the way. Missing a payment on a credit line or a contract is something that can happen to the best of us. Here’s what you need to know about the consequences of late payments and the actions you can take in the wake of one.
Definition of a late fee
A late fee is a surcharge added to payments made after their due dates. Essentially, it’s a financial penalty for not making a payment on time. The purpose of late fees is twofold: to motivate borrowers to make their payments on time and to compensate lenders for the financial impacts of late payments.
Types of late fees
Late fees can be structured in a number of ways. It’s important to understand which type of late fees you might be subject to. Here are a few of the most common late fee calculation methods:
- Flat-rate late fees are a fixed amount added to a late payment, regardless of the amount of money that is owed.
- Interest-based late fees are calculated based on a percentage of the outstanding balance, and they typically grow over time. This means that the more money you owe and the longer you wait to pay it, the bigger your late fee will be.
- Combined late fees blend flat-rate and interest-based late fees. For example, an initial flat-rate late fee could be charged immediately. Then, if a certain amount of time passes without payment, an interest-based additional charge could be applied.
Late fees in contracts
Late fees typically have to be agreed upon by both the lender and the borrower in the form of a contract. Within the contract, the specific terms and conditions related to late payments will be explained in detail. The legality and amount of late fees can vary depending on jurisdiction as well as the type of agreement made.
Impact of late fees on financial health
If you’ve ever watched a mafia movie, you’ll know that owing money is a liability. It’s not good to have outstanding debt that isn’t being paid on time. Below, we explore some of the impacts of late fees on your financial health.
Effects on credit score
Late fees are likely to negatively impact your credit score. Although a late payment of a day might not result in a credit score drop, payments that are late by thirty days or more are likely to be reported to credit bureaus. The longer a payment goes unaddressed, the more negatively it will impact your credit score.
Consequences of late payments
You already know that a late payment will likely result in a late fee. However, the consequences don’t end when you catch up on your payments. Lower credit scores are associated with higher APRs or interest on loans as well as additional fees.
The relationship with cash flow
If you’re a business owner and you have contracts with clients or customers, you should build late fees into your contracts. This will ensure that customers make their payments on time, so that cash flow into your business is smooth and predictable based on your sales.
If you owe money, making late payments can negatively impact your cash flow. By accruing late fees, you’ll have to utilize more of your liquid cash, limiting your financial flexibility.
Common causes of late fees
Late payments can happen. However, understanding what factors contribute to late payments can help you avoid them as much as possible.
Missing due dates
A common reason behind late payments is missing the due date. If you’re making a one-time payment that you’re not used to completing on a regular basis, you could miss the due date. Additionally, if you’re paying your bills manually, you could miss a due date.
This human error in making payments is often frustrating because it’s likely that you had sufficient funds to complete the payment—you just missed the date.
Insufficient funds
If you have automatic payments set up for recurring expenses, it is likely that late payments will be the result of insufficient funds. This can happen when you have recurring payments that fluctuate, like utility bills, and you don’t have the necessary amount in your bank account.
Alternatively, insufficient funds issues can happen when paying by check or another method that isn’t instantaneous. Because it takes a few days for a check to clear, other charges may be made to your account beforehand, leaving your balance too low to make the payment.
Forgetting payments
Sometimes it’s the case that you’ll forget payments altogether. Keeping track of payments can be a juggling act for individuals or companies that have multiple accounts and bills to pay each month.
Strategies to avoid late fees
Now that you understand the challenges to making a payment on time, let’s dig into some strategies that will help you combat the most common pitfalls.
Setting up autopay and reminders
If you’re someone who frequently misses due dates, one of the easiest ways to eliminate this challenge is to set up autopay. Autopay is a recurring transfer of funds set up to automatically tap into a bank account or credit line to pay recurring bills. Once you’ve successfully set up autopay, you’re off the hook for remembering specific due dates.
Even if you’re not ready to set up autopay, it’s a smart idea to set up reminders for payment due dates. You should use a method that you know you’ll pay attention to, whether that’s a reminder on your cell phone, laptop, or calendar.
Importance of grace periods
Grace periods are set periods of time after a late payment where services are not cut off, late fees aren’t yet applied, or both. Grace periods are set up by creditors with the knowledge that humans will sometimes make mistakes. If you notice that a due date has passed without making a payment, try to update your account as soon as possible by making a payment so that you can take advantage of any grace periods offered by your creditors.
Negotiating with creditors
If you’re approaching a due date for a payment and you know that you will struggle to make a full or timely payment, be proactive. Reach out to your creditors and let them know that you’re anticipating a challenge. This shows responsibility and attention to the payment, even if you’re not able to make it in full. Sometimes, you can negotiate to lower your payment, push back the due date, or set up a payment plan.
How to manage and resolve late fees
Having a late fee applied to your account can feel like a financial failure. How you deal with the late fee, though, is important.
Communicating with lenders
Lenders will appreciate communication even if you are struggling to make payments. By communicating about your ability to pay, you’re showing commitment to the loan or line of credit. In lieu of full, timely payments, strong communication is a great way to build trust with lenders.
Requesting waivers
If you have made a late payment and a late fee has already been applied to your account, you might still be able to negotiate with your creditors. Oftentimes, creditors will forgive or waive late fees, especially for lenders who have a strong track record of financial responsibility.
In the US, one of the best ways to negotiate with your creditors is over the phone. This is more personal and immediate than writing an email or trying to use digital communication.
Adjusting budget and payment plans
After suffering a late fee, you might consider adjusting your budget or adopting a payment plan. Your first focus should be on identifying the cause of the late payment. From there, you can consider cutting back on non-essential expenses to free up more liquid cash to make any payments and cover the late fee. If necessary, create a new budget that addresses the issues of the late payment. It could be purposeful to build more of a buffer into your budget for fluctuating expenses.
Importance of timely payments
The bottom line is that making timely payments to creditors and lenders is a key to financial health and wellness. On-time payments are one component of financial literacy and smart budgeting, whether in your personal life or in a business context.
Maintaining a good credit standing
Making timely payments is not only essential to building a strong credit score, it’s often considered the most important factor in maintaining a good credit rating. When you make on-time payments over a long period of time, you’re demonstrating your financial responsibility, which is highly valued by lenders and creditors.
Benefits of on-time payments
In addition to boosting your credit score, a long history of on-time payments gives you access to better loan terms. You’ll also maintain good relationships with creditors and lenders, which can ultimately lead to increased opportunities. For example, creditors might offer you lower interest rates.
Long-term financial implications
If you have long-term financial goals, consistent on-time payments will open many doors for future lending, including lower interest rates and a higher credit limit. Whether you want to take out a mortgage for a house, apply for credit for a large purchase, or take out loans for higher education, a better credit score will facilitate the process.
If you’ve borrowed money, chances are you’re going to pay it back—either on time and in full, or with added interest and fees. Making payments on time will help minimize the additional costs associated with debt, putting more money back into your pocket.
FAQs
What are some of the most common reasons for late payment?
Common reasons for missing payments vary based on how you’ve chosen to complete a payment. If you’ve set up autopay, the most common reason for missing a payment is insufficient funds. If you’re making payments manually, the most common reasons for missing payments are missing due dates or forgetting to make payments entirely.
Is there anything I can do to avoid paying a late fee once I’ve been issued one?
Sometimes, yes. If you reach out to the financial institution or the creditor on the contract, they sometimes will waive a late fee especially if you routinely make on-time payments or if you have a valid reason for missing a payment, like a medical emergency or other extenuating circumstance.
How can I improve my credit score if it has suffered from a late payment?
The best thing you can do for your credit score after a late payment is to consistently make on-time payments moving forward. Paying off any outstanding payments—plus the late fees—as soon as possible is also a good idea. Lowering your debt-to-credit ratio will also help to improve your credit score.