DEFINITION of 'Late Fee'

A late fee is a charge a consumer pays for making a required minimum payment on a credit card after the due date. Late fees encourage consumers to pay on time and may vary, though some are typically $25 for the first late payment and $35 for subsequent late payments. Some credit card issuers will waive the late fee the first time a consumer misses the minimum payment deadline; other credit card issuers do not charge any late fees at all, but only issue cards to consumers with very good to excellent credit — consumers who are unlikely to ever pay late. Still other cards offer no leniency and will charge a late fee even if cardholder barely miss the payment deadline.

BREAKING DOWN 'Late Fee'

It is recommend to pay a credit card bill in full and on time each month, but if a cardholder cannot pay it in full, making at least the minimum payment on time means they can avoid being charged a late fee. If the cardholder does not have enough money in their checking account to cover the credit card payment, not only will the payment still be classified as late, the cardholder will also likely incur a returned payment fee from the credit card issuer and an insufficient funds fee from the bank.

Ways Late Fees Can Increase Outstanding Balances

Late fees may be incurred on other types of accounts if payment is not received by its due date. Insurance payments, rental fees, and other structured payments that follow a schedule may be subject to late fees if the due date is missed. The penalty may be increased as more time passes between the date the payment was expected and when it was finally received. Late fees may be rolled into the outstanding balance and then become subject interest, further compounding the borrower owes.

If a cardholder is late making the minimum credit card payment, in addition to paying a late fee, they will also have to pay interest. Their account may also be subject to penalty repricing, meaning the interest rate will increase to the penalty APR because the credit card issuer considers them a higher credit risk. Making a late payment might be a simple oversight, but it might be a sign of financial trouble.

Late fees are one of several fees credit card companies charge consumers in order to make money. Credit card consumers are also subject to annual fees, balance transfer fees, foreign transaction fees and returned payment fees. All of these fees are avoidable, however, if the cardholder carefully selects the credit card, follows the terms, and avoids behaviors that trigger such fees.

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