What Costs More–A Bounced Check, Credit Card Late Payment Penalty or Payday Loan

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Riding on the DC Metro last week, I saw a billboard that caught my attention. It asked which was financially more costly, a bounced check, a payday loan, or a credit card late payment penalty. The answer surprised me, and it’s worth considering this question. Most all of us at one time or another have bounced a check (I have), obtained a payday loan (I haven’t), or paid a credit card payment late (I have). For many of us, a bounced check or late credit card payment is the result of disorganization or distraction. But in some cases, tough choices have to be made.

Imagine that a $100 credit card payment is due, but you don’t have the money to make the payment. And to make matters worse, payday is a day AFTER the payment is due. So what are your options? One option would simply be to make the payment one day late. You’ll incur a late payment penalty and your credit score may be adversely affected. You could send in a check on time, hoping that the credit card company didn’t present it to your bank until the day you get paid. If it reached your bank too soon, however, you’d end up paying a bounced check fee AND a credit card late payment penalty. And finally, you could get a payday loan to cover the $100 payment, and pay the loan back on payday.

So let’s look at the cost of each of these options to see which one is the most expensive.

Cost of a Bounced Check

In a survey published by Bankrate.com, in 2007 the average cost of a bounced check was $28.23. For a $100 check, that represents a fee of more than 28%. And the actual cost could be much higher.

Recently, banks have implemented a tiered fee structure that charges customers with repeated bounced checks more as they bounce more and more checks. According to our friends at MSN MoneyCentral, Wachovia (now part of Wells Fargo) introduced such a fee structure that charges a customer $25 for the first bounced check, $30 for the second, third and fourth, and $35 after that.

In some cases a financial institution will pay the check but still charge its customer for insufficient funds. While that would avoid the late payment penalty from the credit card issuer, paying nearly $30 to “borrow” $100 for one day until payday is steep.

Cost of a Credit Card Late Payment Penalty

More and more credit card companies have gone to a tiered penalty system. For example, Discover credit cards charge a late payment penalty of $19 on balances up to $250, and a $39 fee for balances greater than $250. Citi credit cards use a three tier system ranging from $15 to $39, depending on the outstanding balance. In addition to the late payment penalty, many credit card issuers may increase your interest rate or decrease your credit limit (or both) based on a late payment. As a result, the actual cost of paying a card late could be far more than just the late payment penalty.

Cost of a Payday Loan

The cost of a payday loan varies from state to state as a result of local laws. It also varies depending on the amount of the loan and the loan’s duration. Generally, however, a $100 payday loan for seven (7) days will cost $15. Given the bad press that the payday loan industry receives (and often deserves), it turns out that a payday loan is the best option over bouncing a check or paying a credit card payment late. In addition to being the least costly option, it has one other big advantage–it protects your credit score. With both the bounced check and late payment options, one runs the risk of having the late payment reflected on their credit history. With a payday loan, you meet your financial obligations on time.

What’s interesting about this result is that consumer advocacy groups seem far more focused on payday lenders than big banks and credit card companies. More and more states are enacting laws limiting payday loan charges that effectively run cash advance lenders out of business. While the payday loan industry often deserves the reputation it has earned, the irony is that in some cases, it may offer the best option for a consumer in a difficult financial situation.

Published or Updated: September 13, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Michael_W says:

    One technique I’ve used in the past to avoid the other options is to call the creditor. If you know ahead of time that you’re going to have trouble making the payment, calling them will sometimes give you some leeway. They will also waive late fees sometimes, if you ask. But, that takes a little more discussion.

    As for bouncing checks, I believe that’s illegal and can actually be prosecutable. I’m not sure of the actual limit before they start prosecuting, but it’s not something I would do on purpose.

    • DR says:

      Michael_W, good points. Calling the creditor is a great idea. And you’re right, intentionally writing a bad check is not only illegal, but depending on the amount, can be a felony!

  2. Four Pillars says:

    Brilliant post – I’ve never really understood the animosity against payday loan operations. Yes, they are scummy and charge hi fees but that doesn’t mean they should be illegal.

  3. Dan_H says:

    I don’t know.. I think the examples here don’t tell the FULL story. The example uses a $100 payday loan, and a $15 charge for it. Well, that’s a 15% fee! I would imagine that most people getting payday loans are borrowing much more than a mere $100. If you take it to $1000 dollars (not unreasonable), and use that same 15% fee then it’s $150, which is certainly much more than a late payment fee. Of course, this does not take into account your credit score and such.

  4. Gene says:

    I am a small business owner and I completely disagree that a payday loan is the way to go.

    I see these loan agreements on a weekly basis. In Illinois, if you don’t pay back your payday loan in the prescribed time (usually 7 to 21 days), they charge you an APR of 400% to 600%.

    Today, I got one from an employee who borrowed $200 and now owes $516 ($200 principle + $316 interest) in less than 4 months!!

    The payday loan industry preys on those who can least afford it and the least knowledgeable of finance. You’re better off paying the late fee.

    • DR says:

      Gene, why not get the payday loan and pay it on time? Wouldn’t that be cheaper than paying late fees AND taking a hit to your credit?

  5. Gene says:

    DR,

    If you can pay it back – great. However, the people who are most likely to take out loans seem to be the least likely/able to pay it back.

    The penalties for not paying back a payday loan are EXORBITANT. They are significantly worse than a late fee and a tiny hit to your credit. In many states, the payday loan companies force you to sign a wage assignment in order to get the loan. Thus, they can legally garnish your paycheck! That $100 at 500% APR quickly grows.

    Your loan becomes a monster that can never be satisfied.

    • DR says:

      Gene, I think you and I agree on this one. If you can’t payback ANY loan, including a payday loan, don’t take the money. That said, statistics on payday loans may surprise you. To get a payday loan, you must employed and have a checking account. The average income of a payday loan recipient is over $50,000 a year. I should add that another option would be cash advance from another credit card. Not a cheap alternative either, but fees generally run less than a payday loan.

  6. Chris says:

    Gene,

    I am guessing that what you saw was a contract for an installment loan and not a payday loan. Typically, a payday loan has a set fee for the period of the advance and the only additional fees would be a late fee and/or NSF if run thru the bank. To fixate on the APR is incorrect due to the short period of the loan. The APR analogy is similar to the cost involed with renting a car. You pay an amount for the loan for a short period of time, not over a year. If you rent a car for a day, it is a set fee. You are not paying that fee daily for the entire year, just for the short period. This is the same excercise that can be used for hotels, apartments and anything else that is borrowed or rented for a short period.

    The industry “preys” on no one and is available to anyone that has an open, active checking account and verifiable income. The last thing that any financial business wants to do is to put someone in a position that they cannot repay. This is foolish and as a businessman, you should know that it is the path to certain failure.

  7. DR says:

    Chris, the comparison between payday loans and renting a car or staying in a hotel is excellent. It really makes no sense to annualize the cost of a 7 day loan. By that measure, just about any late fee (whether for a credit card payment, mortgage, rent, etc.) would cost well over 1,000% on an annual basis.

  8. John says:

    Another thing to consider:

    If you have not previously had a late fee on the checking account or credit card in question, or if the last late fee you had was more than a year ago, many banks and credit card companies will waive the late fee as a courtesy on an one-time-only good-customer-relations basis.

    Granted, they probably won’t do it more than once, but if you are faced with the situation described in the set up, and your history is clean, you could at least consider taking the hit on the late fee with at least the hope of having it waived.

    Just a thought . . . . .

  9. TheGooch says:

    Um., what about overdraft protection? Or isn’t that a factor?

    • DR says:

      TheGooch, good point. Although overdraft protection is getting more and more expensive. At Citibank, they charge you a $10 fee PLUS double-digit interest.

  10. michael roman lach says:

    Removing lates can be a big pain! I have sent lots of letters to the credit bureaus, the collectors, credit card companies, etc. Eventually I just hired a reputable non-profit based on a friends reference. RemoveMyCreditInquiries.ORG was their website. They removed hard inquiries, 30 day lates, 60 day lates and 90 day lates. I am not sure if they do anything else. They charged me only $15 as well.

  11. helene krause says:

    does a bounced check affect your credit rating???

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