Understanding Late Payment Penalties

The average American carries one or two credit cards that he or she uses every single day. Since virtually every cardholder has been charged with a penalty of some sort at one time or another, understanding how late payment penalties work is an important concern.

So how do you avoid credit card penalties? With every credit card you apply for, always read and understand the fine print very carefully. Credit card penalties are outlined in the application form that you sign before you actually receive the card and should clearly define the stipulations regarding how and when your credit card issuer is allowed to charge you penalties and other fees on your account.

For starters, think of your credit card as a loan. When you pay the loan on time, you only pay the amount you actually borrowed. Simple enough, right? To the contrary, if you fail to make even one payment, you will be charged interest as well as penalties on top of the money you borrowed. This can be an incredibly expensive proposition for cardholders over time. So before using your credit card, look for the specific details regarding penalties, or, simply call and ask your credit card issuer about how and when your card payment needs to be settled before being levied with a penalty. Knowing this piece of information will go a long way in helping you avoid penalties now and in the future.

Credit card companies have utilized late payment penalties and fees as a way to offset risk for late paying borrowers, but also as a means to earn more revenue, plain and simple. But as a cardholder, you can avoid paying for these credit card penalties if you know the rules and guidelines well in advance.

Credit card penalties take different forms. Typically, a penalty will appear on your statement immediately after missing your payment deadline. Unfortunately for consumers, card companies' act quickly when it comes to assigning late payment fees. Most credit card issuers will charge you a pre-set penalty regardless of your outstanding balance amount with additional finance charges that accrue on top of the late payment fee itself. Since credit card issuers typically have pretty wide latitude when it comes to interest rates that they can charge their customers, it is important to understand the cardholder agreement upfront. Depending upon the size of your outstanding card balance, late payments can add up to hundreds or even thousands of dollars each and every month. Card issuers will assign steep penalties as an incentive for their cardholders to make their card payments on time. Either way, even if you don't make you're payments on time, the card issuers still win.

Due to the increasing competition in the credit card industry, however, card issuers are continually faced with pressure to keep finance charges as low as possible for consumers in order to remain competitive in the marketplace. Consequently, as a result of these market forces and an improvement in consumer education regarding the danger of finance charges, card issuers have increasingly become more and more reliant upon late penalties and fees as a primary source of revenue.

The simplest way to avoid credit card penalties and additional expenses is to simply make sure that you're payment arrives well within the due date time frame. Whatever you do, don't attempt to time your credit card payment to arrive on, or just before, the due date. The card issuer will assign late payments based upon when the payment has been "posted" to your account. It may take the card issuer a day, or several days, to post a payment, even though they have received your payment on or just before the due date.

For example, let's say that your card payment is due on the 15th every month. Let's say you just happened to send out your payment on Tuesday, the 10th and the card issuer doesn't receive your payment until Saturday the 14th of the month. Well, even though they received your payment before the due date, they will most likely not be able to post the payment until Monday the 16th. Unfortunately, in this situation, you will incur a late payment penalty because your payment did not "post" until after the due date. If you do happen to incur a late payment fee, call your credit card company immediately and explain the reason for the late payment. Often times, if you happen to be a long-standing customer, the card issuer will reverse the late payment fee and credit it back to your bill. Don't count on this to happen often, however, even if you are a long term customer.