Having a credit card can be convenient, but it comes with its share of pitfalls. You can't be naive regarding matters related to its usage, as late payment can create a mountain of debt to overcome. It is important that you are very clear about what are the policies of credit card companies about delinquent payments.
If you are a cardholder and have recently been late in making a payment, then it's vital that you try to pay the balance, along with the interest rate in full, as soon as possible. That's because late payment can increase your debt substantially. The reason is the interest rate structure, that is implemented by credit card companies which can charge a substantially high interest rate in case of delay.
Using a credit card is borrowing small loans for a short period. Each month, there is a fixed due date for payment. Grace period for delayed payments stretches from 20 to 50 days, but the exact number varies with different companies. Paying within the grace period is the best strategy, as paying later will cost you a lot more.
What Delinquent Payments Can Lead to
Late payment can have adverse consequences for your economic plans. Credit cards are best used, only when it is absolutely impossible to pay in cash and only in cases of emergency. If you borrow substantially on the card and are consistently late in paying up, while it will be profitable for the company, it will affect your monthly budget and your credit score quite adversely. Here are some of the consequences that you may face, when you are late in paying up:
Increase in Interest Rate
Defaulted payments can lead to an increase in interest rate that's charged every month. It can even be hiked to the default interest rate, which is the highest that any creditor can charge. This higher rate of interest makes your finance charges each month go higher.
A standard penalty is the charging of a late fee, which is included immediately in the next month's bill. These late fees can range from about USD 15 to USD 35, depending on the credit card company. The late fees will be imposed each month, till you pay up the balance in full.
Increase in Rates of Other Cards
If you have got more than one card and any one of your credit card companies has an inbuilt universal default clause in the agreement, then the interest rates of other credit cards will increase.
A Mark on the Credit Report
When there is delay in payment and the defaulter is more than 30 days late in paying, the companies have to report it to credit bureaus. They make an entry in the credit report against your name, which stays on their logs for about seven years. Since your credit score is calculated on the basis of this credit report, your credit score is also affected.
Credit Score Impact
The score is a number in the range of 300 to 850, that shows your ability to pay back credit. It pretty much decides how much you'll be trusted by banks with a loan in the future. The payment history highly influences the credit score and a delay causes significant reduction.
As you can see, credit card companies charge a lot more, when they are paid back late. Not only do you let late payments affect your credit score, it can jeopardize your financial planning too. Credit always comes at a substantial price. The best way to deal with a delinquent payment is to avoid making one. Plan your expenses and make sure that you are alerted about payment due dates at the right time.