Money Myths: “Late Fees Aren’t the End of the World”

We all know about the evils of credit cards.  We know that credit card companies will let you borrow money “free” and then hit you with enormous interest rates that nearly reach the statutory limits of usury. We know that many millions of Americans are trapped in their credit card debt and find it nearly impossible to climb out. We know all of this because every other personal finance article discusses the dangers of credit card usage. What is rarely mentioned are the greater evils of late fees.

“…And now I’ll be paying my cable bill late or else I’ll be adding yet more money to my mountain of credit card debt,” said the woman sitting across the room as I sat in the library. I have been in credit card debt, and lived several years where expenses totaled more than monthly income. I’m used to the depressing and difficult game of  “which bill can’t be paid?” I wonder how many struggling families make the same barter as the women across the room: pay a bill late to avoid credit card debt.

The ills of credit card debt might be well-known, but most late fees charge far higher rates of interest than the worst interest rate on a credit card.

credit card

My Car Insurance Bill

Have you ever wanted to pay an extra $10 on your car insurance bill? That’s what my insurer charges every time I miss a payment deadline. It doesn’t sound as expensive as the $40 my credit card company would charge for being late. It’s far better than the $60 that I’d have to pay for a late property tax bill. However, this $10 is the most expensive interest payment of all my bills.

The problem with late fees is that they are a fixed amount issued every time you are late. They might be fixed sums – but think about how late fees work. Instead of paying the installment you owe, you are charged a fee and often given additional time to pay. It really isn’t all that different than being charged interest on loan.

My car insurance bill is a monthly payment of $150. Paying a $10 fee is equivalent to a 7.5 percent monthly interest charge. If I were to pay my bill late every month this year, the annual rate would be 90 percent – 6 times the rate of my credit card.

Fee Trouble Does Exist

If you’ve ever seen your money siphoned off by the Great Late Fee Monster, you aren’t alone. When Fed researchers evaluated Obama’s Mortgage Modification policies, they found that the programs caused participating homeowners to rack up month’s of late fees. Most homeowners in a mortgage mod suffered effective interest rates of over 80 percent on the mortgage payment expenses. Of the revenue earned by banks, fee income makes up nearly 50 percent.

Ways to Avoid Late Fees

If your late fee would be greater than the rate of interest charged on your credit card, then you might want to consider setting up auto bill-pay with your card as payment method. Doing so will guarantee that you will avoid fees. If you come up short for the month, you’ll be charged a lower interest rate on the credit card than you would be paying with a late fee.

Use the payment scheduling options when paying bills online. Most sites that accept online payments will allow you to set the day of the withdrawal in advance. This gives you the option of setting up a payment on the due date. You can always cancel the withdrawal if you need.

Pay bills when they arrive. If you can’t be trusted with the credit card or having money in your account by the end of the month, you might want to consider a more conservative approach. Most people plan bill payments around the due date. There is nothing that says you cannot pay as soon as a bill arrives. By writing the check as soon as a bill lands in your lap, you’ll prevent late payments and the stress of meeting a deadline.

Everyone is different, and the best way to avoid fees will not be the same for everyone. Be realistic about your financial strengths and weaknesses before trying these methods. Saving money on late fees is not going to do your finances any favors if you rack up tens of thousands in credit card debt to avoid a $10 charge.

8 Responses to Money Myths: “Late Fees Aren’t the End of the World”

  1. If a late fee does happen, see if you can get it waived!

    A few years ago, I paid all my bills in the first week of the month – it was a week where the payment periods always overlapped, so it was easy to get them all done at once. But then I went out of town that week, so paid them all early. Or so I thought. When I paid the cc bill, the period hadn’t yet closed, so I paid the outstanding amount. When the period closed a few days later I didn’t think about it, and there were a few days worth of charges on it. Well… the next bill had a late fee because I had paid the balance 3 days before the period closed. I called and explained what happened and they waived the fee. It was definitely my mistake, but it was clear I was a good customer, so they wanted to keep me happy!

    • Great point and I should have put it in my post. So long as a late fee is rare, you should be able to get them waived. Although, I have run into some unwilling servicers.

  2. I absolutely hate late fees! What I hate even more is when cards jack up our rate even more if you miss a payment. Thankfully that’s not been an issue for me for years. I am a diehard believer in auto pay so you can avoid them.

    • For a long time I disliked the loss of control with auto pay. However, I’m now a believer in the practice. There is great comfort in knowing late fees are not plaguing my finances.

  3. Another fee to look out for is overdraft fees. Banks offer overdraft protection but all that really does is transfer money from your savings to your checking account and charge you a fee for doing so. Know how much you have in each account and transfer/spend accordingly.

    • Overdraft fees are definitely trouble (all bank fees are; ATM fees earn banks the most in case you were wondering). Although, I’m not sure I’ve heard of overdraft protection working the way you describe. Mine works like a credit card. I have an overdraft limit. Any amount booked to the overdraft account earns interest as about 18 percent APR.