Credit cards require you to make a minimum payment on your balance at the end of each billing cycle. But what happens if your credit card payment is late? Whether you're short of funds or you just forgot, let's look at what happens if you pay your credit late one month.
Late or Missed Credit Card Payment: What Happens
Missing a payment can have dire consequences, especially for someone who is working to improve their credit score. Here's what can happen if you make a late credit card payment:
- You may be charged late payment fees (typically £12 per late payment)
- 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
- You won't be eligible for a grace period on interest charges the next month
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, such as 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 a late payment.
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, however, the late penalty charge has the smallest consequences, other than an annoying charge, of course. But at least 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
Missing a payment can mean your interest rate goes up. This can apply to your stated rate, but can have bigger consequences for those on a 0% purchase or balance transfer promotion. Those offers are typically contingent upon you paying on time; missing a payment usually means you lose the 0% rate and start paying the stated interest rate going forward on any remaining balances.
Credit card companies generally don't raise the stated 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 late 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 may 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. Your credit card provider might give a grace period on late payments, so it's worth asking if this has happened to you. Also, sometimes if you are proactive and call them right away to explain that your payment is on the way (even if it's a day late), they won't report your late payment.
Beyond being a mark for potential lenders to see and use, late payments within the past 6 months may 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. As this late payment "ages" it will have less impact on your score.
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.
Interest Free Grace Periods
Another way that a late payment can cost you is that late payments make your next payment ineligible for an interest-free grace period on new purchases, which you might otherwise get if you pay off your full balance (including any balance transfers and money transfers) by the payment due date. Why? To get the grace period you also need to have paid your previous month's balance in full by the due date.