Late Payment Fees Inch Up
2019 marks the first time in three years that the Consumer Financial Protection Bureau (the Bureau) has raised the cap on late payment fees that credit card companies can charge you for missing the minimum payment or exceeding the limit on your personal credit cards. But that will be the least of your worries if you fail to catch up quickly.
If you pay the balance due plus the late payment fees within your card’s grace period — usually 21 to 30 days — the credit card issuer will not report your late payment to the credit bureaus. In fact, if the late payment was an isolated incident, you may even be able to persuade the issuer to waive the late payment fees.
If you fail to pay up within the grace period, however, the issuer will report the delinquency to the credit bureaus, which will immediately lower your credit score. A single late payment can bring down your credit score as much as 100 points, according to USAToday.com.
This is because payment history accounts for 35 percent of your credit score, making it the most important of the five factors credit bureaus consider when rating your credit.
A 100-point drop in your credit score is more than enough to lower your credit rating from “excellent” to “good.” In fact, a late payment will do worse damage to an “excellent” credit rating and take longer to recover from because it signals a dramatic change in an otherwise pristine credit history.
Although an isolated late payment can cause your credit score to plunge momentarily, it is unlikely to affect your score for very long.
If you miss your payment two months in a row, your credit card company can raise the interest rate it charges on your balance and new purchases to a penalty, or “default,” rate. This rate, which is the highest rate allowed by your agreement, was hovering around 30 percent in early 2019.
If you meet all terms of your personal credit card agreement over the following six months, you can request that the issuer reinstate the prior interest rate on the balance you carried before missing your payment. The issuer has the right to continue charging you a higher rate on new purchases.
Higher penalty fees
Late payment fees and other penalty fees vary between credit cards and can rise with the size of your balance. For instance, late payment fees might rise from $15 on a balance of $500 to $25 on a balance above $500.
Starting, Jan. 1, 2019, issuers of personal credit cards can charge you up to $28 for the first violation or up to $39 if you’ve made the same violation within the previous six billing periods. That compares to $27 and $38 respectively in 2018 and $25 and $35 in 2013. Violations include late payment, underpayment and exceeding your credit limit.
The Bureau, which was created by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act), recalculates the caps annually based on the CPI-W, which measures the annual percentage change in earnings for urban wage earners.
While they are not required to, many small business credit cards comply with all or some of the 12 protections offered by the Credit CARD Act. These include a ban of “universal default,” which prevents your credit card issuer from raising the interest rate because you made a late payment on a credit card issued by another company.
After payment history, the next biggest factor determining your credit score is credit utilization, or the percentage of your available credit that you’ve borrowed. This measures how close you are to exhausting your credit, so the lower the percentage the better. Many personal finance sites recommend keeping your credit utilization below 30 percent.
If you anticipate having to borrow money for a vehicle or other major purchase, you may want to drive it lower still. Credit utilization accounts for 30 percent of your credit score.
Another tactic you can use to stabilize your credit score in the near term is to delay opening new credit accounts.
How you shop for new credit determines 10 percent of your FICO score, which is used by 90 of the 100 largest U.S. lenders to determine an applicant’s creditworthiness.
Applying for or opening too many new accounts in a 12-month period can hurt your FICO score. However, most credit scores are not affected by a sudden rash of inquiries from auto or mortgage lenders on the assumption that the consumer is merely shopping for the best deal, according to Fair Isaac Corp., which owns the analytics software used to produce FICO scores. Typically, these so-called “soft hits” to an individual’s credit report are treated as a single inquiry and have little impact on his or her credit score.
For information on your rights under the Credit CARD Act, consult the Consumer Financial Protection Bureau.
For more information on how to improve your credit score, visit myFICO.com.