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What is late-payment forgiveness?

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What is late-payment forgiveness?

Miss a credit card payment and you know what happens: You get hit with a late fee and your interest rate soars.

But what if that didn't have to happen? What if your credit card waived your late payment and didn't charge a penalty rate?

This isn't as unusual as you might think. Multiple issuers now advertise credit cards that offer late-payment forgiveness programs.

But are these cards a good idea? Not surprisingly, financial experts are split. Some say they teach bad spending habits. Others say that they can help busy consumers avoid the occasional late fee.

Count Erica Sandberg, a TV host and personal finance expert based in San Francisco, as a fan -- with some reservations -- of late-payment forgiveness.

"I like innovations in credit cards that are targeted to people's personalities," Sandberg says. "If you know that you are a forgetful person or that you have a crazy life, a card that has late-payment forgiveness might be a good choice for you."

Sandberg does have a caveat, though: Consumers need to remember that not everyone with whom they do business will be as forgiving.

"Not everything in your life is going to work around your forgetfulness," Sandberg says. "You don't want a card like this to make you think that it's OK to be late with your payments on a regular basis. It's not."

How they work

Customers looking for late-payment forgiveness shouldn't necessarily expect a lifetime pass for tardy payments. While cards like Citi Simplicity® Card promise no late fees and no penalty rate ever, other cards like Discover it® say they won't charge a late fee for your first late payment.

Tony D'Amico, chief executive officer of Strongsville, Ohio-based The Fidato Group, said that cards that offer late-payment forgiveness are good choices if used properly. But he worries that some consumers might rely on them as an excuse to make bad financial choices.

It's not good to make a credit card payment late. That's because of compound interest.

Every day that you carry a balance on your credit card, you're costing yourself money because your credit-card provider is adding interest to your balance. If you make a payment two weeks late, your balance will grow according to your interest rate. If you are carrying a hefty balance at a high interest rate that late payment could cost you a significant amount of money.

Know the risks

Consumers need to understand, too, that there is a difference between paying a credit-card bill a few days late and not making any payment at all during a complete billing cycle. If you skip an entire billing cycle -- if you are 30 days or more late in making your payment -- your card issuer might report your delinquent payment to the three national credit bureaus, even if these issuers advertise late-payment forgiveness.

A delinquent payment won't look good on your credit report could send your credit score tumbling, something you never want to happen.

Even if your card doesn't advertise late-payment forgiveness, many issuers may provide an occasional break to customers in good standing, Sandberg said.

Sandberg herself recently forgot to make a payment on a store credit card, so she called customer service.

"I called and told them that I screwed up," she says. "They took away the late fee. If you are a once-a-year-I-screw-up customer, you might already have that card that offers late-payment forgiveness. You just don't know it."

The right card?

Those who advise caution on these cards worry that sometimes the lure of late-payment forgiveness might cause consumers to pass on credit cards that offer better rewards programs and lower interest rates.

Leanne Phelps, senior vice president of card services with State Employees' Credit Union in Raleigh, N.C., says that her financial institution offers a credit card with a minimal late fee: $5 if payment is not received within five days of the due date. The credit union also doesn't report late fees to the credit bureaus until consumers are at least 60 days late on their payments, Phelps said.

The lesson here? Late-payment forgiveness is a nice benefit. But it's not the only feature consumers should consider when choosing a card.

Financial attorney Leslie Tayne, founder of Tayne Law Group and a debt specialist, says that this is why she's not a fan of credit cards that advertise late-payment forgiveness.

Besides, it should be easy for consumers to pay their credit-card bills on time today: You just need to set up an automatic payment from your checking account for the day on which your credit card bill is due, she said.

Those consumers who struggle to pay their credit-card bill on time because of cash-flow issues can always call their providers to ask for a different due date, Tayne said, one that falls on a day on which consumers are more likely to have money available.

"These cards promote the mindset that it's OK to pay your bill late," Tayne says. "I don't believe in that, and I believe that it encourages bad habits."

D'Amico doesn't disagree, saying that cards advertising late-fee waivers are targeting customers whom they know are likely to miss payments, carry balances and incur more interest.

"It's like when a casino offers to pay you $25 just for going inside," D'Amico says. "The chances are that the people who go into the casino won't limit their spending to $25. They know the demographic they are targeting and what the result will be."