Why missing your monthly payments is a spiral of doom

1105-725497-mI’m like obsessive about my bills. I know when exactly they are due, I know which ones are ACH withdrawals and which ones are debit card. I know exactly how long it takes for the ACH ones to go through and exactly how much each month I have in bills.  Its borderline OCD. I have lists upon lists of bills scribbled everywhere on top of my budget apps, and my budget spreadsheets.

My monthly bills fall all over the place with due dates, its really quite annoying. Some are due on the 7th and others due on the 17th (trust me, I’ve called to have them change them and its a big pain in my ass, so I deal with it). But KNOWING when they are due allows me to PREPARE for when they are due. I know that on the 12th of every month, no later than the 14th I HAVE to have the money in my account for my car insurance to come out. (takes 2 days to go through with this particular ACH withdrawal) I have to watch what I spend over the course of those two weeks after I get paid to ensure I have that money in my account.

Paying your bills on time is incredibly important. It seems pretty obvious right? To pay them on time is just what you’re supposed to do. But WHY is it so important!?

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Well first off, depending on the bill, it can dramatically affect your credit score. For example, my payment history for my car is 99% perfect. There was ONE payment back in 2012 that was 30 days late. Just one, and it affected my credit score.  It sucks a big one, there’s also 3 missed payments on a student loan (it was inbetween the grace period and starting school again) which drops my payment history to less than perfect on those as well.

Missing payments hurts your credit. Its one of the main reasons why you should be striving to get your bills paid on time. If you want to buy a house or maybe get a new car or maybe you want to take out a business loan, having good payment history and a good credit score is key.

Missing payments is a total snowball affect, a spiral of doom if you may. Once you miss one, well now the next payment you’ve got two to pay. If you can’t afford to pay two, then you’re going to have 3 due the following month. It just builds and builds and takes much longer to fix the problem.

It also costs you more than the monthly payment to miss one. I’ve yet to come across a company that DOESNT charge a late fee, and if you miss your credit card payment your slammed with a crazy late fee (hello, mine is like $40!) PLUS interest! Depending on your interest rate, it can add up quick. For example, when I had a credit card balance of $950 (I paid it off last month, woot woot!) I was paying $20-22 a month in interest. if I were to miss my payment, I would pay a $40 late fee plus the $20 in interest, so $60 all together. The following month, I’d now be paying interest on that $60 as well!  If you are trying to pay things down quickly like I was/am, I have a strategy for you, it works well for me!

This is what I did:

My minimum payment for my card was $25, but I wanted to pay it down faster by paying $200 a month. My payment is due on the 10th of every month. But after my first paycheck, and paying my rent, plus my car insurance I didn’t always have that $200 to pay by the 10th. So I’d pay the $25 minimum before the due date to avoid the late fees and then once I got my 2nd paycheck I’d pay the remaining $175. It kept me on time with my payment and I’m still paying the amount I wanted each month. It also occassionally paid my bill for the next month as well. Like for January, since I paid off my entire balance at the end of December, it counted towards my February’s bill. So I technically had a $0 payment due for January. I still paid of course for January, just as I normally would. But I didn’t need to if I needed to place that cash elsewhere. (I still use my credit card monthly, but never charge more than 15% of the credit limit, and try to pay off the balance in full every month) 

My sister gave me a great strategy, which would work well for a mortgage, or a car payment, or even student loans! Make payments every other week. For example (we’re going to use February & March 2015 as the months in this example):

Say you have a $400 car payment that is due on the 10th of every month. Obviously you need to have your Feb payment made in full the $400. So you pay that by the 10th. If you can manage (this requires you to have a little extra cash to start out) on the 24th of February you pay $200 towards your car payment. On the 10th of March you pay the remaining $200. Then on the 24th of March you pay another $200, so on and so forth. You’re breaking your payment down into smaller chunks, which usually allows you to spread things out a little bit and gives you a little extra padding throughout the month. If your paycheck is say $1000, and you pay your $400 out of that check you’ve gotta make that $600 remaining last, rather than say $800.

So what does this do, besides give you a little extra cushion, and ensure that your full payment is on time each month?

It adds an extra payment. Yep, a whole extra payment. Paying your loan down even faster. If you pay your payment monthly you pay 12 total payments. But every other week? There are 52 weeks, divided by 2 = 26, divide that by 2 =13. One whole payment. If you have a loan that lasts 5 years and you pay every other week, that is an extra 5 months of payments, paying your loan off 5 months earlier! 

So we know WHY its so important to get your bills paid on time. Hurts your credit, can cost you more and it can spiral out of control. So what are some good ways of keeping track?

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Keep a spreadsheet or word document of your bills and when they’re due. That way you always have a list and you can update as needed.

Place the due dates on a calendar. I ALWAYS do this. I’m a very visual person, I like to see when things are due. I color code my Google Calendar when things are due.

Set up reminders. Not for the DAY that they are due, but for a few days before. Mint.com can send you reminders of bills that are due! Or you can set up reminders through your phone’s calendar. Its important to set them up either for a few days before or the day before, because some places (like credit card companies) have a time deadline. So any payments marked for a date after say 8pm will show as paid the following day, making it late)

Always pay your bills FIRST, before you spend on luxury items or extra expenses.  When I get paid, the first thing I do is pay my bills. Before I spend any money on anything else, even groceries.  My first paycheck typically goes towards rent and my car insurance, the extra is for groceries and luxuries. My second paycheck pays the rest of my bills, (including my auto transfer into savings) the remaining goes towards the other things in my budget.

Once you figure out a system that works best for you its much easier to keep track of when things are due and keeping things paid on time. One thing I’d love to eventually do is live off of last month’s paychecks, however it requires me to do a lot of additional saving on top of the saving I’m already doing in preparation for a move. Right now, it doesn’t work for me. Eventually I’d love to make it work!

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2 thoughts on “Why missing your monthly payments is a spiral of doom

  1. These are great tips! A financial adviser once said to me “pay yourself first”. I thought, wait what? Does that mean go and buy all the expensive things I want, NOW? NOPE! Pay your debt first, pay yourself for the future (investing, saving) and then you pay your immediate self. Another thing that has helped me is to tackle the biggest debt first! Thanks for sharing, and good tip on how to split the burden of a big payment between multiple checks. xoxo, Sam.

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