The Real Cost of Late Payments

Making a payment after the due date happens to many people. Simply forgetting, a pay date that falls a few days after the due date, life happening, or an emergency, the reasons are endless. What is important is to fully understand the real costs incurred when payments are made late and to set up steps to avoid the problem. Late fees may seem really small in the scope of life’s expenses but if consistently incurred can cut into your cash and throw a wrench into any budget which will slow progress toward achieving financial goals. No one plans for the expense.

The first thing that a late payment does is adds a fee. Companies can choose to add a flat fee or a percentage of the balance to the current bill which is expected to be included with the overdue payment. In an economy where most people are feeling the crush of increasing prices and find that their money doesn’t go as far as it used to, extra fees can be the straw that breaks the camel’s back. Setting aside an emergency fund would cover the concern of timing issues or the surprise expenses that come.

Many experts encourage setting aside at least three months of living expenses in case of emergency. Being a realist, I suggest putting as much aside as you can until you reach an even number that can cover most surprises such as $1,000. In order to make an emergency fund work, the expense must be an emergency, and a pizza on Friday night does not constitute one and most important, the fund must be reimbursed on the next pay day. Set up a separate savings account to avoid the money from filtering into you regular spending.

As the ability to upload information increases, so does the ability for companies to report if a payment is made consistently late. Many companies allow a grace period where the late payment is not reported to the credit bureaus. It is not recommended to consider the grace period as an extension of the due date. Forgetting that a grace period exists and focusing on paying before the due date is the best method to ensure good credit reporting. Paying a week to ten days in advance is optimal, this allows for mailing time or processing when paying on the web.

When a person has a marginal credit score, companies who are considering extending credit will take into consideration the payment history of existing accounts. Multiple reports of late payments will have a negative impact on the score and force a potential creditor to measure credit worthiness. The company may consider late payments as a risk not worth taking because the likelihood that their payments will be late is pretty strong.

It costs companies millions of dollars to collect late payments and unfortunately the effect of the losses are eventually passed on to the consumer in higher prices. The assignment of a late charge penalty is a tool companies use to ward off late payment habits. There is a window of opportunity for collection that is a short period of time but once the payment reaches the next scheduled due date, history shows that the debt is probably going to move to collections. This will cost the company more money with a low chance of recovering the expenses, the older the debt gets, the lower the recovery rate.

With the recent fallout of the mortgage industry and astronomically higher than average foreclosure rates all companies are finding it less attractive to extend credit. Consumers are going to focus on keeping a roof over their head and a car in the driveway, so if an expense like the cable bill has to fall by the way side, then it does. I can guarantee the shut off of a service such as that comes swiftly after a month of nonpayment. Being able to work within a budget and living within the means of income is more important today than it has ever been.

If you find that you are consistently making lake payments, it is recommended to sit down with your budget, or write one, noting all of the due dates. Pen in pay dates and make a few concessions that will allow the payments to begin to be made on time. If a payment is over-due more than 30 days or it will be before you work it in, contact the creditor immediately and give an exact date and amount the payment can be expected. It may take some sacrifice of unnecessary spending for a month but the shift to on time payments will save money in the long run that can be filtered into fun spending. The overall goal is to protect credit and increase spendable income and eliminating late fees, one of life’s little annoyances will help achieve it.

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