Late Fee: Definition, How They Work, and How to Avoid Them

What Is a Late Fee?

A late fee is a charge that lenders and other companies impose on you when you fail to make an on-time payment. You may face late fees if you're late making payments on a loan, a credit card, or any other type of financial agreement, such as an insurance policy or rental contract.

Late fees are designed to encourage you to pay by the due date and should be specified in the contract or other agreement. Lenders must notify you about any changes to late fees in advance and in writing.

How Late Fees Work

Lenders like credit card companies and other creditors make money in a variety of ways, including by charging consumers various fees like late fees.

Late fees are levied when you don't pay a bill by a certain date. For instance, if you fail to make your monthly credit card payment—at least the minimum—by the due date, the card company may impose a late fee that will show up on your next statement. Or a landlord may charge a late fee if you don't pay rent on time.

All late fees must be explicitly described in credit card agreements, leases, or other types of contracts. Creditors legally can't charge excessive late fees. What constitutes a "reasonable" fee is a matter of debate. In most cases, late fees typically range between $25 and $50.

Some creditors provide a grace period before they impose the late fee. For instance, your rent may be due on the first of every month. But the landlord might allow you to pay rent by the 10th without incurring a late fee. A grace period must be clearly stated in the lease agreement.

Some creditors waive the late fee the first time you miss the payment deadline, while others do not charge any late fees at all. Still other lenders offer no leniency and charge a late fee even if you just miss the payment deadline by a matter of minutes or hours.

Late fees can increase your outstanding account balance. For example, a late fee may be added to the next month's credit card statement. Not only does that raise the balance by the amount of the late fee, but you would then have to pay interest on the late fee as well.

Impact on Your Credit

Missing a payment due date can also have a negative impact on your credit history and credit score. That's because payment history plays a major role in credit scoring models, making up about 35% of your FICO score, for example. So, the more payments you miss, the more you will pay in late fees, and you can also expect your credit score to take a hit.

How to Avoid Late Fees and Other Penalties

You can often avoid late fees by arranging for your bills to be paid automatically from your bank account. This depends, of course, on you having enough money in the account to cover the payment.

It's always a good idea to pay a credit card on time and in full each month to avoid interest charges. But if you can't pay off the full balance, making at least the minimum monthly payment on time will help you avoid a late fee.

In some cases, late payments can also trigger other charges. For example, if your checking account does not have enough money to cover a credit card payment, you can also incur a returned payment fee from the credit card issuer as well as a non-sufficient funds (NSF) fee from the bank.

Lenders may also review and raise interest rates based on payment history. This is referred to as penalty repricing. When that happens, the lender will raise your interest rate to the penalty annual percentage rate (APR) described in the credit agreement, which may be considerably higher.

Late fees are just one of several types of fees banks and other companies charge consumers. For instance, credit card users can also be subject to annual fees, balance transfer fees, foreign transaction fees, and returned payment fees. These fees can be avoidable if you choose your credit card carefully because not all cards impose every fee. You can also avoid fees by following the contract terms.

Cracking Down on Junk Fees

The Consumer Financial Protection Bureau (CFPB) announced in March 2024 that it would cap credit card late fees at $8, down from a typical fee of $32. It estimates this will lead to average savings of $220 a year for 45 million consumers who now pay late fees.

However, the rule is opposed by banks, and the U.S. Chamber of Commerce filed a lawsuit and a request for a preliminary injunction to keep it from taking effect. It says the rule will cause financial institutions to pass along costs to consumers who have never paid late.

Under the Credit Card Accountability Responsibility and Disclosure Act of 2009, or the CARD Act, late fees must be "reasonable and proportional" to the costs that credit card issuers incur as a result of late payments. But in February 2023, the CFPB report noted that late fees currently range as high as $41 and generate income that is about five times greater than the collection costs.

The CFPB has also reported on "junk fees" related to other types of borrowing. Some auto lenders, it said, illegally charged late fees that are more than what's stated in their loan agreements. For example, an auto loan servicer might assess a $25 late fee when the terms cap late fees at no more than 5% of the monthly payment amount, even if the $25 late fee exceeds that 5%.

In the case of mortgages, the CFPB has reported that some servicers also charged late fees in excess of the amount spelled out in the mortgage terms. The lenders even charged late fees after explicitly saying they would not.

Student loan servicers had a different issue, according to the CFPB. Their customer service representatives would sometimes accept a loan payment by credit card over the phone, then reverse the payment after learning that the servicer did not accept credit card payments. At that point, the borrower would incur a late fee.

Frequently Asked Questions (FAQs)

The Bottom Line

Late fees can be excessive, and sometimes illegal. To avoid them, try to pay all of your bills on time. You can enroll in automatic payments through your bank to help. If you incur a late fee and you aren't habitually late with your payments, the creditor may be willing to waive it.