Do late fees affect your credit score? Understanding how late fees work

When life gets busy, keeping track of your finances can be a challenge. And if you're like most people, the occasional missed payment may be hard to avoid. Unfortunately, this habit can come with what can become a big problem—the late fee.

Late fees and other penalties are common after a missed payment. While they might motivate you to pay on time, receiving one can be both annoying and inconvenient.

Luckily, there's hope when it comes to avoiding late fees, and the first step can start with understanding how they work. To help you get your payment schedule on track, here's what you need to know about late fees.

What is a late fee?

A late fee is basically a penalty you get when you fail to make a payment on time. Lenders and creditors charge customers these fees in the hope that it will encourage them to pay by the due date. Besides being an extra bill to pay, late fees could also have some pretty negative effects on your credit—but more on that later.

The terms of your late fee should also be outlined in the conditions you agreed to when taking out a loan or a credit card. In most cases, though, they range from $25 to $50 per instance. If there are any changes to your late fee terms, the lender is required by law to notify you of these changes in advance.

How credit card late fees work

Late fees can do more than just prompt you to make payments timely. They can also be one of the ways lenders make money.

Most lenders consider after 5:00 p.m. on the payment due date to be late, but this can vary based on your contract. For credit cards, late fees usually show up on the next month's statement. In most cases, you'll be given 30 days to pay the amount due

Some creditors might offer you a grace period before charging any late fees or skip the fee altogether if you've never missed a payment before. Others might leave late fees out of their policies completely.

Landlords and late fees

Credit companies aren't the only ones who are able to charge late fees. In fact, rental leases may contain penalties for missed payments. So if you're a renter, your landlord could be one to keep an eye on in this department.

The silver lining here is that your landlord often can't legally kick you out for being late on your rent, especially if it only happens once. In many cases, landlords offer a grace period in which you can make your late payment without any fees. Just be sure to check your rental agreement so you know what to expect.

So how much can your landlord charge you for a late payment? This answer depends on where you live, but a standard fee is around 5% of the total cost of your rental payment. For example, if you pay $1,000 in rent each month, a late fee would be somewhere near $50.

Does the IRS charge late fees?

The Internal Revenue Service is the federal bureau responsible for collecting tax payments. For those who can't make their payments on time, the IRS has another job—charging late fees.

In IRS-speak, late fees are known as "failure to pay" penalties. For each month you fail to pay, you can be charged an extra 0.5% of your remaining tax balance. This penalty could continue to build until it reaches a full 25% of your unpaid balance.

IRS late fees can add up before you know it. If you suspect you'll have to pay, you could consider filing next season's taxes earlier than usual. That way, you'll have more time to prepare before you have to pay.

Late fees and your credit report

In addition to being a nuisance to pay, late fees can also leave a lasting, negative impression on your credit report.

When creditors look at your report, they see a detailed history of your financial activity. This includes everything from credit inquiries to personal statements. Unfortunately, it also includes late payments.

A late payment can be a red flag for many lenders. In their eyes, it can show that you struggle to pay your debts and that lending money to you could be risky. Late payments can stay on your report for up to 7 years, and too many of them could cause a major financial barrier in the future with regard to utilizing your credit.

But don't start mourning your credit score just yet. Late payments usually have less effect on your report as time goes by, especially if you're usually good about making payments on time. So that slip-up from 5 years ago is unlikely to cause you too much harm in the long run, provided it’s not an ongoing occurrence.

The effects of late payments

A note on your credit report isn't the only thing that comes with a late payment. Sadly, late fees are just the beginning. Too many missed payments could have some serious consequences over time.

With that in mind, here’s why it's so important to make payments on time and in full.

Higher outstanding balance

Your outstanding balance is the amount of money you currently have in debt. In other words, it's how much you still have left to pay on the balance. When you're charged a late fee, your outstanding balance can increase.

This might not sound like a big deal, but it can become more serious when interest is added. For example, when you're charged interest on your credit card, your payment is calculated using your entire outstanding balance. So, a higher balance could mean a higher payment.

Late fees tend to be relatively small, but they can add up quickly. If you miss payments frequently, you could continuously be charged interest on the fees themselves. Over time, your $50 fee could wind up costing you much more.

Penalty APR

Speaking of interest, late payments could put you at risk of a penalty APR. Your annual percentage rate, or APR, is just what it sounds like—it's the interest rate you're charged on the balance each year. A penalty APR is an increased rate you're assessed when you fail to make payments on time.

Penalty APRs are usually given when a payment is extremely late—think 60 days or more. The penalty's amount will vary but can be as high as 29.99%. Many times, removing the penalty could require months of on-time payments, but even then, it might still apply to some purchases.

While penalty APRs might not last forever, they can be difficult to accommodate. To avoid them altogether, it’s best to keep up with your payments.

Lower credit score

There's a lot that goes into calculating your credit score, but payment history is usually one of the biggest factors. Under some models (such as FICO), past payments can make up as much as one-third of your entire score.

While everyone's credit history is different, late payments can be a serious blow to your score, dropping it by as much as 180 points. The more payments you miss, the more likely your score is to fall. And once it's down, it can be hard to get it back up.

A low credit score can have unexpected effects of its own. You might have trouble buying a home, renting an apartment, taking out loans or credit cards, or even getting a job. Because payment history has such a big effect on your score, paying on time is crucial for maintaining it.

How to avoid late fees

By now, you probably understand why it's so important to make your payments on time. But for some, this is easier said than done.

If you have trouble keeping up with your payments, you're not out of luck entirely. Just a few simple tricks can help you get back on track. Here's what you can do to avoid late fees and keep your credit report squeaky clean.

Set up automatic payments

If your payment schedule is the last thing on your mind, it may be a good time to turn to automatic payments. That way, your payments will be deducted from your bank account timely every month with no effort required on your part.

Automatic payments can be especially useful for those who have multiple payments to track. For things like credit cards, you can set your auto-pay to withdraw specific amounts for even greater control over your payment schedule.

Because automatic payments can be set up with just a few clicks, it provides an easy way to make sure no bill goes unpaid or late. And even if you choose to pay manually each month, auto-pay can act as a safety net for those months when life gets too busy.

Change your payment date

If automatic payments aren't an option, there's still a way to keep yourself from missing a payment.

Some payment deadlines may fall on days of the month where you have to juggle multiple other expenses. Luckily, these dates usually aren't set in stone. In most cases, you can give your credit card issuer a call, and they'll switch the deadline to the day of your choice.

Your schedule change can be as simple as moving your due date after your payday instead of before. Or, if mid-month deadlines are hard to keep track of, you can consider moving your payments up a week or two. Even a different time of day could make a difference for those who always find themselves cutting it close.

The right schedule is different for everyone, but don't be afraid to reach out to your lender if your current one isn't working for you.

Ask to have your fee waived

Don't want to make your late fee payment? Just ask!

Seriously, it may be possible to have your late fee waived. Some credit card companies even include a first-time late fee pass in their contracts. In these cases, the fee may be dismissed automatically, though it never hurts to ask.

If you rarely miss a payment, there's a good chance you might be given leniency. Simply call your creditor and explain the situation, and they'll let you know if the fee can be waived.

While it's not uncommon to have your fee waived, this perk usually isn't usually granted to repeat offenders. In other words, don't count on being off the hook for your fourth or fifth missed payment.

Choose your card wisely

Prevention is the best way to avoid late fees. Besides building good payment habits, choosing the right card in the first place is the easiest way to protect your finances.

Some banking services have eliminated late fees completely. For example, Varo Advance, which offers advances on direct deposits, doesn't charge late fees or other penalties.¹ That way, your finances can remain intact even if you miss a payment.

To make sure you aren't at risk of a serious penalty, doing your research and choosing the right cards can be the best thing you can do. Apply for your cards wisely, and your future self will thank you.

It's never too late to start building good financial habits. With Varo's help, managing your money has never been easier, so visit Varo today to get started.