The Importance of On-Time Payments
If there is one golden rule when it comes to personal finance, it’s this: make your payments on time.
Your payment history makes up 35% of your overall credit score, so not only does paying on-time help keep your score in good shape, but it makes you look responsible in the eyes of lenders, making it easier to qualify for future loans. Failing to pay your bills on time can lead to fees, interest rate hikes, and other negative repercussions that are slow to recover from.
Read on to learn more about the importance of on-time payments, the potential consequences of paying late, and what to do if you’re unable to pay your bills on time.
Benefits Of On-time Payments
Paying your bills on time each month establishes an excellent record of payment history and looks very favorable in the eyes of lenders. Over time, your existing lenders may even offer you improved terms for your open accounts as a reward. Plus, since your payment history accounts for 35% of your credit score, your score will gradually increase as long as you maintain a record of on-time payments.
To reward you, lenders may increase your credit limit, offering you more spending power and incentivizing you to continue using their products. They may also lower your interest rates over time, as you prove to be a low-risk borrower.
Most importantly, paying your bills on time reduces your financial worry. You can rest easy knowing that your timely payments are working to improve your credit score and solidify your financial future.
Consequences Of Late Payments
By now, you know that making on-time payments is highly beneficial, but are you aware of the repercussions of falling behind on your bills? Missing one payment here or there probably won’t do any significant damage (we all make mistakes, after all), but missing multiple payments over a prolonged period can create a chain reaction of unfortunate events that is difficult to correct.
Late Fees
If you miss a payment, whether your credit card, utilities, or mortgage, expect to pay a late fee.
Credit cards often charge late fees between $25 and $40 if you miss the due date. Utility companies may charge late fees between $5 and $30, depending on the company and the amount you owe. Mortgage companies often offer a 15-day no-fee grace period for late payments; after that, expect to incur a fee of between 4% and 5% of your monthly payment.
When you incur late fees, the minimum monthly payment for your bill increases, as you must first pay the fees before any money is applied toward the principal amount owed. Missing several payments in a row will result in high fees and can skyrocket your minimum monthly payments, making it harder to catch up. So, before you skip a payment, consider how the fees might affect your budget in the long term.
Your Service May Be Disrupted
Utility companies and phone or internet providers may disconnect your service if your payment is over 30 days past due. To have your service reconnected, you’ll have to pay off any late fees and catch up on your monthly payments. Some companies may even charge a reconnection fee to restore service if your account has been cut off.
A Dip In Your Credit Score
As you know, on-time payments account for 35% of your overall credit score. Late payments are reported to the credit bureaus and will count against your credit score. One late payment here or there isn’t likely to impact your score very much, but several late payments could decrease your credit rating.
If your accounts fall into collections or are charged off, the damage to your credit score will be even more severe.
A strong credit rating is essential for qualifying for new credit products and saving you money, so you should do everything you can to protect your score.
Increased Interest Rates
If your payment is significantly overdue, your credit card company may increase your interest rate. This tactic is called a penalty APR, and it’s usually triggered on accounts over 60 days overdue.
Not only is the penalty interest rate typically significantly higher than the original rate, but it usually stays active for six months, even after your account is up to date. That means you’ll be paying a higher interest rate on all past and future purchases, which means your minimum monthly payments will be higher.
Accounts In Collections
Failing to pay your bills for several months will result in your accounts going to collections. Usually, this happens after three or more months of non-payment. Collections remain on your credit report for up to 7 years and could affect your ability to qualify for future credit products, even once you’ve settled your debts and repaired your credit.
Having accounts in collections not only damages your credit score, but it also means you’ll be hassled endlessly by debt collectors.
If the debt remains unresolved for a long time, a debt collector may file a judgment against you and take you to court to resolve the debt. In the end, your wages may be garnished, or a lien could be placed on your property until you settle the debt.
Even if money is tight, do everything you can to avoid having accounts sent to collections. (We’ve got more tips on this below!)
Red Flag For Future Lenders
Because on-time payments are such a significant aspect of your credit score, your payment history is one of the first things lenders will look at when checking your credit. Again, one or two late payments probably won’t raise many eyebrows, but a trend of them certainly will.
Late payments, collections, and charge-offs will remain on your account even after repairing your credit score. When lenders look at your credit report, these marks are sure to be red flags. If you’re competing for a rental, a job, or a loan, that history of late payments could cause lenders to favor someone else’s application over yours.
Strategies To Ensure You Pay Bills On Time
By now, it should be evident that making on-time payments is a powerful way to prove your creditworthiness. Juggling multiple bill payments each month can be challenging, so here are some simple tactics you can use to ensure you never miss a payment.
Automate Bill Payments
If you struggle to remember when your bills are due each month, why not automate payments? Some lenders even offer discounts to customers who set up auto-payments, which is a great way to save a few dollars each month.
Set Up Payment Reminders
Creating payment reminders is a good alternative if you’re not comfortable enabling automatic payments. Use the calendar app on your phone to create reminders around your monthly bills. Set the notification to remind you at least a day ahead of the actual due date in case you’re unable to make the payment instantly. Try to set the reminders to occur at a time when you’re likely to be online and able to make the payment.
Put Funds For Bills In A Separate Account
Using a separate bank account to pay your bills is a great way to ensure you don’t overspend each month. Each time you get paid, divert some money from your paycheck into your bill payment account to ensure the necessary funds are available when the payment date rolls around.
Consolidate Your Payments
If you’re in debt and struggling to keep up with your monthly bills, consider consolidating your debt. Debt consolidation involves taking out a loan to pay off your existing debt. Then, you repay this loan as one monthly payment until the debt is settled. Debt consolidation makes it easier to keep track of your bill payments and often enables you to repay debt at a much lower interest rate than you’re currently paying.
It’s not suitable for everyone, but it can be a powerful way to make progress against debt for some borrowers.
What If You Can't Pay Your Bills On Time?
No matter how responsible you are with your money, there may be times of hardship when you simply lack the funds to pay your bills. However, you may have more options than you realize. Before you resign yourself to paying late, try the following strategies to help you through difficult times.
Contact Your Lenders
Communication is the foundation of every good relationship, and you may be surprised to learn that that includes your lenders! Whether you need some grace around your rent payment, electricity bill, or credit card, your lender can help.
Contact your lender and explain the situation. They likely have the means to split your minimum payment into installments so you can keep your account current without having to pay the total amount in one lump sum. This strategy is beneficial if you have several bills that you’re struggling to pay at once.
Look Into Hardship Programs
Local nonprofits or social service agencies in your area may provide assistance for individuals who are struggling to make on-time bill payments. Do a quick internet search for [bill name] + “hardship programs” to see what’s available in your area. You probably have more options than you realize!
If you’re struggling to keep up with rent or mortgage payments, look into federal assistance programs through the U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Veterans Affairs.
The Bottom Line
Making on-time bill payments is one of the best ways to grow or maintain your credit score. Your payment history is one of the first things lenders will look at when considering you for a loan, apartment rental, or mortgage, so it’s essential to make on-time payments every month. Using auto-pay features or calendar reminders is a clever way to keep your accounts current (and avoid pesky late fees) even when you have several monthly bills to track.