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This chapter is from the book

Step 2: Pay Your Bills on Time

If you're new to the idea of credit scoring, you might have no idea how damaging just one late payment can be. I got this email from Brenda, a woman in Douglasville, Georgia, who was flabbergasted that all of her recent efforts to improve her credit score could be undone by one unpaid bill:

"I recently had a score of 640. I was late on a payment for a personal loan, and now it's 555. I now know that I can't afford to be late again, but that shouldn't have dropped my score that much, should it?"

Oh, yes. And the better your credit, the more a late payment can hurt.

Lenders are looking for any sign that you might default, and a late payment is often a good indicator that you're in financial trouble.

Because payment history makes up more than a third of the typical credit score, ensuring that your bills get paid on time—all the time—is essential.

Now, for those of you panicking over that credit card bill you sent in two days past the due date: You can stop sweating. Normally a payment has to be at least 30 days overdue for a creditor to report it to the bureaus.

That doesn't mean paying even a day late is a good idea, of course. Creditors increasingly are eager to slap their customers with late fees and jack up interest rates in response to late payments. Some have moved from due dates to due times; for example, a payment is considered late if it isn't in their hands by 1 p.m. on the date that it's due.

Furthermore, you can face higher interest rates on all your credit cards and your insurance policies if you fall behind with even one creditor. Many lenders and insurers periodically review their customers' credit reports and adjust their rates based on what they find.

You also can't skate on creditors that don't regularly report to credit bureaus. You might not have seen your cell phone account or your electric bill showing on your credit history, but that doesn't mean these vendors won't report your delinquencies if you don't pay them on time.

How to Make Sure Your Bills Get Paid on Time, All the Time

I occasionally get letters like the following, which try to put the blame for late payments on someone else:

"I recently checked my credit report after moving and found that my credit card company was reporting that I was 60 days over due. I'm absolutely certain I haven't received the bill for that card in several months, or I would have paid it. Aren't they required to give me some notice before they report information like that to the credit bureaus?"

This might be a shock to some folks, but the answer is no. You're responsible for paying your bills whether you get a statement or not. You need to keep track of what you owe to whom and make sure that everyone gets paid, even if the U.S. Postal Service falls down on the job.

Keeping track of these details also can help you detect identity theft. Some criminals like to steal credit card statements out of residential mailboxes. The bolder ones file a change-of-address form with the post office so that your mail gets redirected, allowing the bad guys to sort through it at their leisure.

To stay on top of what you owe and when, you should make a list of every bill you must pay each month and the date that it's due. (Although credit card due dates can vary, they're usually around the same time each month, give or take a few days.) Then list any bills that are due less regularly—every other month, every quarter, every six months, and annually.

Now, using either a paper calendar you can hang prominently on a wall or an electronic calendar in your computer, enter all your bills. Get in the habit of checking the calendar at least weekly to see what bills are coming up and to make sure they're all getting paid.

You can set up electronic reminders to help you as well:

  • If you have a Palm or other personal data assistant, you can configure it to alert you.

  • Many Internet Service Providers (ISPs), such as AOL and MSN, provide email reminder services.

  • Bill-reminder features are part of personal finance software, such as Quicken and Money.

  • Some credit cards, including Discover, email you when your bill is due.

If you really want to protect your credit, though, you should take further steps to avoid human error. The more of your bills that you put on automatic, the less worries you'll have about late payments, late charges, and dings on your bill.

There are a few options.

Automatic Payments

An automatic payment allows the companies that you owe to take their payments directly from your checking account each month, with no action on your part—no checkbook, no stamps, no fuss. This is my favorite way of paying bills, and it could be yours. Just muster up the guts to try it.

A lot of people balk at the idea of letting a mortgage lender, utility company, or other vendor have regular access to their bank accounts. Some feel it's somehow an invasion of privacy. In reality, the vendor can't "see" into your account or monitor what other activity is going on there. The money comes out basically the same way it would if you paid by check or by other electronic transfer.

A federal law prohibits vendors from taking out more than you authorize. If a mistake is made—and in more than a decade of paying bills automatically, it's only happened to me once—the company is obliged to replace the money it took in error.

Many people insist that they need control over when bills get paid. Typically, these folks have gotten into the bad habit of juggling bills or of not keeping enough cash in their checking account to cover their ongoing obligations. It's a good idea to always keep a "pad" of $500 to $1,000 in your checking account, regardless of how you pay your bills, and to sign up for overdraft protection on your checking account. These lines of credit, which usually cost less than $50 a year, can pay for themselves the first couple of times you avoid a bounced check.

Or perhaps you've fallen into another bad habit—not paying your credit card balances in full. If that's the case, be sure to read later about how that can hurt your credit score. In the meantime, know that most credit card companies have several automatic payment options. They can take out just the minimum payment or a set dollar amount each month instead of the full statement balance. If you opt for these partial payments, you can always pay more by check or online.

Really, you only have two choices: to pay your bills on time, or pay them late. If you want good credit and don't want to worry about missing due dates, automatic payments are the answer. You will still get a bill each month with plenty of time to correct any problems on the statement before the payment is made.

My suggestion to you is this: Try it. Pay one bill a month this way. You can start with a mortgage payment or a student loan, because these payments tend to be the same each month, and the lenders might even give you a break on the rate if you agree to automatic payments. Just phone your lender and ask whether they offer automatic payments. (Some call it "direct debit" or "direct payment.") If they do, they will send you a form to fill out. Do so, send it back, and you'll be on your way.

You'll probably soon find yourself converting more and more bills to automatic payment. Then you'll never again have to worry about forgetting a bill or missing a payment while you're on vacation.

Recurring Credit Card Charges

If you're not quite ready to let vendors have access to your checking account, you can have some of your bills charged automatically on your credit card.

Using a credit card can give you an extra layer of protection, because if a mistake is made, you have the credit card company to act as a middleman. You can dispute an erroneous charge and not have to pay it until the problem is resolved.

This method of paying bills comes with two rather large caveats, though:

  • You should try this only if you can pay off the card in full each month—Paying credit card interest is rarely a good idea, but it's never advised when you're paying basic monthly expenses.

  • You should use this only with your smaller bills—It matters to your credit score how much of your available credit you use, whether or not you pay your bill in full each month. If paying your bills would bring you anywhere close to your credit limit, you'll be hurting—not helping—your score.

Online Bill Payment

For those who really need that illusion of control or who pay vendors that don't offer other forms of automatic payment, online bill paying can be the answer.

You can set up your system so that you decide when each bill gets paid, but you also can set up recurring payments so that bills get paid automatically. The difference is that you, not the vendor, can decide when these recurring payments start and stop.

Of course, this works only for bills that are the same amount every month. Credit cards and other bills that vary require that you specify the amount that gets paid each month.

The downside of many online bill payment systems is the cost, which can range from $5 to $15 a month. Although many banks have wised up and now offer free online bill paying, others still insist on charging. If your bank does, you might nag them about making it free.

Online bill paying has another advantage, one shared by automatic charges. Electronic transactions leave excellent "trails" that can show exactly when the bill got paid, so there's never a question of a check getting lost in the mail. If you have a vendor that's constantly slapping you with late fees, and you suspect they're deliberately not processing your check, you can put a stop to those games with electronic payments.

What if none of the solutions thus far works for you? You have one more good option.

Just Pay Your Bills As They Come In

If you sit down and pay each bill immediately as it arrives, most of your worries about late payments will be solved. You'll still need a calendar to keep track of your statements and due dates to make sure a bill hasn't gone awry, but you won't have to worry about losing a notice in a pile of other paperwork.

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