Card Issuers Boost Late Fees

It will be more costly to be late on making monthly payments on your credit cards. In his excellent article in the Wall Street Journal, Zachery Kouwe summarizes the recent penalties for being late. In the first place, "late" has been re-defined. Five years ago, the average card issuer allowed cardholders 31 days to make a minimum payment on their accounts without incurring a late charge. According to Robert Hammer of R.K. Hammer, a card-advertising firm in Thousand Oaks, CA, the average "free period" has now dropped to 20 days.

Not only has the length of the free period declined, but the penalty for a later payment has increased. MBNA has raised its penalty for being late on accounts with balances of at least $1,000 from $35 to $39. As a result of such increases in late fees, MBNA's revenue from fees was 36 percent higher in the first quarter of this year than in the same quarter a year ago. Diners Club (Citigroup) has announced that cardholders who fail to make their required minimum payments within two billing periods will forfeit their club rewards points. It has also raised its late fees from $20 to $30. More generally, Consumer Action reports that over the past year the number of cards charging a late fee of at least $35 has doubled. Although some commentators criticize the increases in late fees, others argue that the extra cost of collecting delinquent accounts should be borne by those consumers that are delinquent. However, Morgan Stanley Dean Witter economist Kenneth Posner pinpointed the most powerful restraint on issuers: "Card issuers need to be careful about being too aggressive with penalty pricing, we believe, because it could lead to unexpected attrition."