Budget Buster Late Fees a Golden Goose for Banks

Budget Buster Late Fees - Professor Cardworthy

Budget buster late fees have been around for a very, very long time and will likely to hang around forever. Amazingly most Americans are unaware late fees are a “golden goose” for the banking industry, unlike an other industry.

I dare say the vast majority of American consumers, especially young, tightly budgeted or paycheck-to-paycheck families have found themselves in the position of which bills to pay first. Generally, consumers prioritize utility payments (electricity, water, telephone, internet, etc) over other payments like credit cards.

About 40 years ago my family of five found ourselves in an extremely uncomfortable position of deciding which utility to pay, as we had no emergency cash or credit lines to back us up. So in order to keep the family warm, the electricity on, the water running, and the telephone connected – we decided the only option was to write the checks for each for payments due and then mail them in the wrong envelopes. 

The power company got the telephone check, the oil company received the water payment, and vice versa. The simple strategy worked, but obviously unethical (forgive us Lord). We received very nice phone calls from each of the companies letting us know they received the wrong payment. We apologized and all of them said they occasionally run into this issue with their older customers.

Playing Dumb

They sent the checks back and then we re-mailed them to the proper company. It took nearly 14 days to get it all sorted out, plenty of time for us to get the enough money into the bank to cover the checks. All the companies did not charge any penalty for the delayed payment.

At the time, recurring house-related bills were not paid electronically but rather by paper checks. Companies also did not have virtual assistants, email, or representatives from another country, handling phone calls. 

Understandably, my wife never repeated this practice. Shortly afterward, I developed another source of income which alleviated future financial money crunches.

To pull off a stunt like this is nearly impossible today and it is very unlikely companies would refund a late fee in any event. But I can offer you some real advice on avoiding these nasty nuisance fees.

Late Fee Gold

Why do banks charge late payment fees?

Late fees are ubiquitous in today’s marketplace but in some cases the fees are regulated such as those charged by utilities.

In the past they have been largely cost-driven. When someone pays late the bank would contact the customer via a telephone call with a followup letter.

With structured loans like a car loan, mortgage ot installment loans, the late fee is assessed to recover lost earned interest, and the customer service costs of notifying the customer and to some extent to offset the cost of a future loss or even fraud, or in other words risk factors. Ofc ourse the intention of the late fee is to encourage regular and timely payments in accordance with the contract.

With open ended loans like a revolving line of credit the costs are far less as interest continues to accrue. There may be a security asset involved like a second mortgage on a home or other assets. even if fully secured, loan interest continues to accrue. There are still the costs of notification and risk reserves.

Since most bank loans are substantial there is usually human interaction with the bank to make sure all is well with the customer and assurance future timely payments will be held.

When it comes to credit cards it is a far different story. Apart from risks the costs are minimal. 

Late Fee Basis

At a business conference many years ago there was a discussion over now to best to assess late fees and what to charge. Exhibits were displayed showing the impact of setting a weekend day as the due date, concluding Sunday was the best as customers had very few options to met the deadline at the last moment. Legally, if a payment due date falls on a Sunday then it is not subject to a late fee as it is not considered past due until the close on Monday.) In the real-world most consumers are not aware of this exemption.

As far as the amount of a late charged the answer was simple: whatever the market will bear. At the time of the conference the most popular late payment fee was $10 and there was a consensus the fees would meet customer resistance if raised to $15.

This same pricing concept was adopted by many issuers in the 1980s wherein the majority of major issuers charged a fixed 19.8% interest rate instead of 20.0%. (In many states credit card rates were capped at 18% in the 1980s.) The same was true of annual fees wherein most issuers considered $20 to be a price point consumers would not react negatively. Interesting, a major bank launched a no annual fee card in the late 1980s, but charging a fixed 21% interest rate and no grace period. 

Starting in 1990 the hotbed of competition was focused on the annual fee. We will explore how this developed in another episode.

Back to our discussion on late fees. Since 1990 the market changed and today credit card late payments fees have soared things to more than $30, with many major issuers charging $38 fee per occurrence. As far as timing, this has changed too as customers can electronically pay their accounts 24×7 and due dates are usually adjusted by a day or two. However, if given a choice a Sunday is still the best due date.

Late Fee Secret

The costs of a credit card late payment are purely electronic and automatically triggered in many cases at 12 midnight eastern time. The hair trigger is so fast that if you make a payment on the due date, the late fee will be assessed, and then automatically reversed the following day or two.

When I started following the credit card business in 1986, banks would not assess a late fee until the closing date or about five days after the due date. One the nation’s top five banks offered a 15-day grace period before they would charge a late fee. Please note the grace period i am referring to is the period between the due date and the billing date, not the time period between the closing date and following due date, wherein you can avoid all interest charges by paying the balance in-full.

While late fees are assessed to encourage timely payments, with credit cards they are a highly lucrative consumer bank fee, second only to checking account-related overdraft fees. With declining processing costs, generation of late payment notice (perhaps mailed), the costs are minimal averaging less than $1.50 each or with a profit margin above well above 95%.

While I am privy to the breakdown of credit card fee income by some individual issuers via consulting projects, I cannot disclose exact amount or percentages, but I can say it is “significant,“ among all the issuers I worked with. It is estimated industrywide penalty fee income in the U.S. market runs about $15 billion per year, and more than 80% of the figure is late payment fee income. 

For the last several years early stage credit card delinquency (30+ days late) hovers around 2% of credit card loans. The percentage of cardholders between one day and 30 days late is roughly four times higher. So if a bank has a million cardholders  and levies a $30 late payment fee it is very likely they are raking in close to $2.5 million per month on late payment fees.

Over-Limit Fees Surpressed

The surge for late fees rising above $30 is largely driven by the regulatory ending of over-limit fees about ten years ago. As far back as the late 1980s credit card issuers began adding over-limit fees. This made no business sense and a subject we will fully explore in another upcoming episode.

Credit card issuers would permit cardholders to exceed their credit limits by usually 5% to 10% as a “courtesy” or “to avoid “embarrassment by the cardholder,” but apart from a slightly elevated risk cost there are minuscule costs involved, and furthermore, interest continues to accrue on the higher balance.

I spearheaded the charge to modify over-limit fees around 1990 but it took nearly 20 years before Congress acted upon it. Interestingly two major credit cards in unveiled in 1992 ended their over-limit fees following  personal conversations. 

In one case I sat next to the EVP of a national issuer on a cross-country flight. I did not bring up the over-limit issue, rather when he learned my name he suggested maybe he should switch to another set as he worked for the issuer I referenced in an interview with a national weekly news magazine.

I was able to make my case that over-limit fees were not a “best business practice” in the credit card world. He totally agreed with my points and assured him they would recover the lost income through lower attrition. At the end of the flight we set up a meeting and a golf outing with the CEO. The CEO of the credit card bank later became the CEO of Visa.

In the other case the president of issuing bank, a subsidiary of one of nation’s top 10 corporations, came to New York to privately meet with me when I criticized their new card product in one of the nation’s top five daily newspapers. A week later he flew me to their corporate headquarters to meet his staff to help redesign the card to be more acceptable to consumers, which included getting rid of the over-limit fee and turning it into a selling point. I was also asked to critique their forthcoming TV ads. 

Currently, one of the nation’s top four issuers has turned “no late fees” into a selling point on at least one of their card products.

My point is credit cards remain one of the most profitable business lines at major banks and for many smaller institutions. And the competition has been innovative, robust and intense which is good for everyone, the banks, their employees, investors and of course the consumer.

Suggested Action Plan

But some practices are not the “best.”

As a consumer what do you do the save money with late fees.

1. Always Pay Before the Due Date

2. Make a Second larger  Payment to Help Reduce or Pay-Off the Balance Later Before the Due Date and No later than the closing date (usually 2-5 days) after the closing date

3. If an option, change you due date to a date that works best for you timing it with your pay cycle or moving it away from the end of the month when you are trying to 

4. Signup for account notifications through the banks app to remind you of due dates, balance or charging notifications.

One note, some issuers limit how many payments you can make during a billing cycle, so making weekly payments on a credit card may not work.

Also, do not confuse making a late payment fee with being reported to the credit reporting agencies as a “late payer” or “delinquent.” You are not considered delinquent if you are less than 30 days late. This 30-day period usually starts with the missed payment date, but there are a few banks that start the 30 day window from the closing date.

Late Fee CRA Impact

Making a payment more than 30 days late that is reported to a CRA (credit reporting agency) can be far more devastating than getting hit with one or two late payment fees. It will cause an immediate drop in your score of 20-30 points or as high as 50 points. The impact to your score will begin to lessen after your next current payment, but will take six consecutive current payments to significantly reduce its impact, and up to two years to eliminate its full impact. Late payments usually remain in your credit file for seven years.

Bottom line is follow the advice given. For most working Americans, especially paycheck-to-paycheck families, a $38 late fee can be a major budget buster and could breed other late payments.

If you do find yourself in a situation where you cannot make a credit card payment on time, then contact the issuer and ask for a waiver of a month or two. If you are affected by a natural disaster in any way or a personal disaster (fire, car accident, family death, etc) most reputable card issuers will oblige. It is best if you have a letter from the issuer confirming their acceptance of the delayed payment arrangement.

Remember the card issuer is only giving up their right to hit your account with a late fee or report you as late, but, they are still generating interest charges from the balance every minute.

Postmark or Received ?

I should also point out some consumers believe credit card issuers will not charge a late fee if it was postmarked on or before the due date. There has been legislation introduced into U.S. Congress to set the “postmark date” instead of the “received date” for determining whether or not the account was paid late. It has yet to pass or to be enacted.

However, some lenders like auto loans lenders or mortgage companies may accept the “postmark date,” if it can be verified. If so, the best way to do this is the send it one-way certified mail (a few bucks) which provides clear documentation. You might be able to fight a credit card issuer to refund a late fee if you send them a copy of the documentation and blame the delay on the mail system. However, this may be hard to do as the U.S.P.S. provides tracking of all special mail such as Certified, Priority or Express.

Getting Late Fee Waiver

I went through Hurricane Irma and promptly contacted all my creditors to advise them I may be late and asked them to grant a waiver. All but one agreed, and the unobliging creditor eventually paid the price of losing a good customer, probably for life.

Just remember while credit card issuers hold most of the cards, they do not hold them all. The one card you hold is the most valuable and it is the loss of a customer, and potentially the loss of goodwill among the customer’s family and friends.

The acquisition costs for a bank to sign up a new customer averages slightly more then $200.

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