What is the purpose of late fees in credit card terms?

• A. They encourage on-time payments.
• B. They are discounts.
• C. They increase credit limits automatically.
• D. They eliminate interest.

Answer: (A)

Late fees are penalties charged when a payment is not received by the due date. Their purpose is to encourage on-time payments by making missing a due date more costly. This helps the lender cover extra processing costs and discourages late behavior, reducing the risk of unpaid balances. Late fees are not discounts, they do not automatically increase credit limits, and they do not eliminate interest. If a payment is late, interest still accrues on the balance, and in some cases late payments can lead to higher interest rates or other penalty terms, but the main function of the late fee is to motivate timely payments and compensate for the extra work and risk of a late payment.