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.