Credit cards generally require you to make a minimum payment on your balance at the end of your billing cycle each month. It is very important that you make these payments on time, and if at all possible pay off the whole balance to avoid paying interest. But what happens if - perhaps due to lack of funds or forgetfulness - you do end up paying late or even missing a payment altogether?
There are three main ways in which a late or missed payment can impact you financially:
- You may be charged late payment fees
- Your standard interest rate may increase
- You may lose any 0% interest rate promotions, with interest reverting to your standard rate
- Your late payment may be added to your credit history and can harm your credit score
Let's take a look at the financial implications of each of these situations, and discuss what you need to know.
Late Payment Fees
Your credit card agreement will include a set of default fees that are charged for various circumstances: late payment, returned payment (e.g., a bounced cheque), and going over the credit limit. These fees typically range from £9 (found on Virgin Money cards) to £12, with most cards charging £12. For smaller balances this fee represents a substantial proportion of your total balance. In fact, a single late payment charge can cost as much as nearly a full year's worth of interest. Of the three potential repercussions of paying late, the late penalty charge has the smallest consequences. It is simply a one time cost. You can find the default charges in your terms & conditions, or by checking the bottom section of the Summary Box on your credit card's web page. A Sample default charges section of a Summary Box is shown below, so you know what to look for.
Higher Interest Rates
Credit card companies generally don't raise the interest rate on your credit card without giving 30 days notice and only do so after the first year. These guidelines are not mandatory but are voluntary, yet most lenders adhere to them - a good thing, as they are designed to protect consumers. More information on how the circumstances under which your interest rate can change can be found in The Lending Code. There are some major exemptions to the soft "rules" that your credit card company shouldn't increase your rate in the first year or without notice:
- Interest rates set to directly track an index (e.g., the base rate)
- A promotional interest rate that has reached the end of its natural duration, or has been revoked early by
- the cardholder (e.g., due to a missed payment)
- Interest rates may be subject to risk-based re-pricing due to late or missed payments
Adverse Effects on your Credit Report and Credit Score
Late payments will generally be reported to the credit agencies and stay on your record for six years, so they can have a lasting impact on your ability to get future credit from prospective lenders. Beyond being a mark for potential lenders to see and use, late payments within the past 6 months will also decrease your credit score. The impact will depend on a number of factors including the frequency of your missed payments, the "lateness" of late payments (i.e., the number of days late), and other elements of your credit history.
We cannot overemphasize the importance of paying on time. Late payments lead to a lower credit score, which in turn will decrease your chances of lenders accepting you for a credit card, loan or mortgage. If and when you do get approved, a lower credit score may very well result in a higher interest rate, costing you money over the long term.