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Credit card companies bank on late payments

Published Sep. 10, 2005

Nobody likes paying late fees, but Dave Woodruff holds them in particular contempt, whether they're on his credit card, his mortgage or a video rental.

Here's how he sees it: If his bill payment gets there a minute past deadline, he's hit with a hefty charge. If a customer-service representative keeps him on the phone for half an hour sorting out an error the company made, all he gets is an apology.

"In this economy, if you're a day late, you end up a lot more than just a dollar short," griped Woodruff, 30, a Capitol Hill aide.

The tardy are a reliable source of revenue for companies, which reap millions of dollars in late fees from the lazy, the strapped and the momentarily forgetful.

"Procrastination is one of the most common human traits, probably right after fear of public speaking," said Erik Gordon, a marketing professor at the University of Florida College of Business.

Nobody seems more keenly aware of the phenomenon than the credit card industry.

Consumers paid $6.6-billion in penalty fees to bank card issuers last year, almost double the amount paid in 1995, said James Daly, editor of Credit Card Management, a monthly industry magazine. About 90 percent of that amount was in late fees.

Though the bulk of the bank card issuers' revenue still comes from interest payments, interest rates have been dropping while the average late fee has been rising steadily since 1994, doubling to $28 in 2001, says, an online publisher of information about payment cards.

"The name of the game in pricing things like credit cards is to charge relatively favorable prices on the terms of the account that consumers pay attention to and relatively unfavorable prices on terms that consumers tend to ignore," said Lawrence Ausubel, an economics professor at the University of Maryland.

Annual fees fall into the first category while late charges fall into the latter, Ausubel said.

"Consumers typically think "A late fee won't apply to me.' Firms noticed this over the past five years or so and started aggressively increasing late fee charges."