Although the majority believes that a late fee is not a big deal, it’s better to avoid missing payments. There is a wide range of negative consequences one can get from excessive debt.
However, to avoid late fees, borrowers need to get acquainted with essential information about their loan card issuer’s agreement. You must know the reasonable amount of the late fee, the calculation scheme, the way to deal with a payment due date, and more important aspects.
In this article, we’ll give you guidelines on how to get a handle on unpaid invoices and how to manage the charges without damaging your credit score.
What Is a Late Payment Fee?
A delinquent fee is a monthly finance charge for paying late on your loan or credit card. These percentage rates are usually imposed by credit unions or lenders. The outcomes of excessive credit card late fees may be dangerous — customers can receive a penalty, higher rates, or damage their FICO credit score.
Outstanding fees were introduced to encourage clients not to fail the monthly payments and return the sum before the due date.
The information about these rates must be stated in your financial agreement and explained by the lender before the contract is signed. As a borrower, you have to be notified about any changes to late fee amounts in writing prior to the moment they become operative.
Is It Legal to Charge Late Payment Fees?
Although some say that a credit card issuer may misapply the illegal late fees, the information would be considered a buzz. Any lender or financial company can charge a late payment fee, as it’s utterly legal. Moreover, there are some cases when requesting extra charges is necessary, for instance, for freelancers and business owners.
Yet, such calculations are valid only if the initial agreement allows them. In addition, both parties have to meet the state-specific laws and regulations concerning the due date payment amount the business owner would be able to charge.
Read More: Best Credit Cards With No Annual Fee
How Paying Late Fees Work
Creditors and lenders earn money through different services. For instance, late fees are one of the options.
The dues are usually put on those customers who failed to make a monthly deposit — at least the minimum payment — before a determined date. Once you’re overdue, the missed amount will appear on your next billing statement.
The information about extra charges must be evidently stated in any type of document you have, such as a financial agreement or rent contract, etc. The creditors aren’t allowed to charge excessive late fees, as it’s considered illegal.
However, they can request a reasonable amount for late charges of 1%-2%, which equals a late fee charge to 25 USD or 30 for an initial late payment.
Clients can also expect some lenders and card issuers to offer automatic grace period, meaning they would give the borrower an extra day before they incur a fee.
For example, your rent is due on the 5th of each month, but your landlord would allow you to pay due on the 6th. In case your deposit is made on the 7th, or later, you’ll have to cover subsequent late charges. As mentioned, all the details have to be written in your contract.
Although lots of lenders waive or don’t incur for late payment violations at all, other creditors could prove the higher fee precise to minutes. So, before signing the agreement, go through every chapter of it and consult with your financial provider about such aspects.
How to Calculate a Late Fee
To calculate what amount of fee is necessary to cover, you need to proceed with a few steps. First, determine the annual interest rate. Once you have the figure, you need to divide it by 12 (months). The number you get is your monthly rate. Lastly, you need to multiply this number by the amount due to find out the late fee percentage.
Let’s say your interest rate is 15%, and you’re one month overdue on a project that costs $15,000. To determine a charge fine against a client, one has to multiply $15,000 by the monthly interest rate. In our case, the monthly rate equals 1.25%. Therefore, the amount that card issuers will require is $187.50, and the new balance is 15,187.50 USD.
Read More: Credit Card Late Fees
How to Avoid Late Fees and Unpaid Invoices
When dealing with late payments and unpaid invoices, it is important to have a clear plan of action. One of the first steps is getting to know your clients and their payment behavior. This can help you to anticipate any issues and take preventative measures.
Another essential step is creating a payment policy that outlines your terms and expectations.
Requesting cash deposits in advance or distributing invoices efficiently can also help to ensure timely payment.
Providing various payout options is another critical factor to consider, as not all clients may be able to pay via traditional methods.
Offering early deposit discounts can be another useful incentive for clients to pay on time. If payment is still late, late fees can be assessed, and returned payment fees can also be imposed if applicable.
In some cases, accepting credit card payments can be a useful solution. A proposed credit card allows a card issuer to facilitate payment on behalf of the debtor, which can make it easier for all parties involved.
In addition, the majority of clients would expect issuers to offer automatic payment methods. So, you could think about different ways to make the outstanding contribution convenient for your customers. Being proactive and implementing these measures allows card issuers to charge delinquent sums in time and minimize the negative impact on their cash flow.
How to Create a Payment Policy and Charge Late Fees Correctly
Often the perspective of repayment of the missed figures is on the customers’ side. However, it’s worth reviewing the situation from the financial provider’s perspective.
There are lots of concerns regarding the legal standards and policies in the financial field. Customers need regular reminders and their lenders’ help. It would save them up to 9 billion dollars and ensure the credit card market is fair to society.
Luckily, we have just the scheme that we’re about to share. So, how to receive a payment owed by the cardholder and remind the borrower about credit card accountability, responsibility? Below, you’ll find out how to create a repayment policy and reduce late fees frequency among your clients.
1. Send Out an Invoice With Late Payment Policy
Sending out a notice of proposed rulemaking with a clear late payment policy is standard practice for businesses worldwide.
As per the Consumer Financial Protection Bureau rules on the Card Accountability Responsibility and Disclosure Act, issuers must disclose their delinquent fee, as well as offer consumers the ability to avoid delinquent charges through automatic payments.
In addition, the fee safe harbor caps late fee income at $28, or the amount charged in the previous six months, whichever is less.
The proper communication of a payment policy helps businesses ensure timely deposits by clearly outlining the consequences of delaying. This is especially important for small businesses, as having an outstanding balance can have a significant impact on their cash flow.
By being upfront about undischarged fees, businesses can avoid any conflicts with customers and maintain healthy business relationships.
2. Send Out Payment Reminders
Once you’re done with the policy and have resolved the terms with your clients, you can proceed with sending reminders. Often, borrowers don’t realize their invoices are unpaid and forget to deposit the necessary sum. Sending a notification of the payment due would be an especially effective way to bring to mind their funds fee.
Start by writing a polite email, reminding them they are belated on the repayment date.
Emphasize the amount they need to return, the terms you’ve settled, and your reimbursement policy (if any).
To make a reference, don’t forget to include a copy of the original invoice.
Such a procedure requires card issuers to offer available deposit methods and levy links to accelerate the process. Lenders have to provide an opportunity to apply to other penalty fees if the client has financial problems. If the borrower keeps the sum delayed, don’t hesitate to send several invoices with recurrent intervals to highlight the immediacy.
3. Charge a Late Fee For a Delinquent Payment
Ignoring the invoices and being extremely tardy on monthly deposits allows credit card issuers to potentially charge a delinquent fee. Besides, remember that the lender cannot request any charges unless the information is stated in the contract, resolved, and signed by the borrower.
In addition, when you’re requesting late fees, the borrower’s invoice has to include clear-cut details of such rates under the terms chapter. Although some businesses may request flat charges, in other cases, a higher fee is necessary.
For example, you sent an invoice for $3000 at the end of the 30-day term. Additionally, you’ve mentioned that the lending policy currently allows issuers to charge 1% monthly on an unpaid invoice. Therefore, the daily percentage rate would be 1% x 0.03 = 0.03.
Let’s suggest that your client pays 12 days after the due date. Multiply the daily rate of 0.03 by the total sum of an invoice for $3000 to receive $90. Lastly, multiply this amount by the number of overdue days, which is 12. So, the fees have increased up to $1080 to collect.
Read More: The Best Credit Cards And Card Companies With No Late Fees
How to Add Late Fees to Invoices in QuickBooks
QuickBooks is a suitable app for lenders to calculate and remind clients about credit card penalty fees. Let’s see how to add the information about the overdue charges and set up the notifications:
1. In the Settings section, click on Account and settings
2. Then select Sales, and in the Late Fees section, choose Edit
3. The default charge applied to overdue invoices mode should be switched on
4. There are three types of charges companies incur for late payment:
- Remaining funds percentage
- Flat fee
- Remaining funds percentage and Flat fee
5. After it’s done, type in the Percentage or the Amount you need to charge
6. Set up the Frequency dropdown — how often the fees would be imposed
7. In case you offer a grace period, indicate the number of days you provide the clients
8. You can also change the default name, but the feature is optional
9. Then click on safe.
Afterward, QuickBooks will automatically register a financial account and track down all the incomes to send you regular reports.
Sources Used in Research for the Article:
- CFPB Proposes Rule to Rein in Excessive Credit Card Late Fees, Consumer Financial Protection Bureau, https://www.consumerfinance.gov/about-us/newsroom/cfpb-proposes-rule-to-rein-in-excessive-credit-card-late-fees/
- What is a credit score, Consumer Financial Protection Bureau, https://www.consumerfinance.gov/ask-cfpb/what-is-a-credit-score-en-315/
- Credit Scores, Federal Trade Commission, https://consumer.ftc.gov/articles/credit-scores