Have you ever been late in paying a bill? If so, did you know that this has a very bad effect on your credit score? While it’s not possible to say exactly how much of a hit your credit score would take, it could be 50 points or more. This could drop you from having “good” credit to “poor” credit, which would make it harder for you to get new credit in the future.
Do you know your credit score?
Your credit score is what tells potential lenders how much of a credit risk you would be. The credit score used by most lenders comes from the company FICO and ranges from a low of 300 to a high of 850. If you haven’t seen your credit score recently or even ever, you need to get it. FICO makes it available on its website www.myfico.com. You can also get it from one of the three credit reporting bureaus, Experian, Equifax and TransUnion. If you have a Discover Card you may be getting your credit score automatically every month. There are also websites such as CreditKarma.com and CreditSesame.com that will give you your credit score free.
Are you scared of having a low balance?
You may be one of the millions of Americans that simply can’t afford their bills. But not having enough money in your bank account to pay a bill and not wanting to see your balance grow smaller after you pay one is a different matter. Of course, it’s possible that you might be charged a fee by your bank if your balance drops below a certain amount and you should avoid this if you can. But skipping a payment or being late in making a payment will be much more costly. You will be charged late fees that add up and as you have read, if you’re late in making a payment your credit score will be damaged.
Do you think carrying a balance will help you build credit?
Do you believe that if you carry a balance on a credit card it will help you build credit? If so, think again. One of the two best things you can do with a credit card is pay your bill on time and use only a small amount of the credit you’ve used. This gets into what’s called your debt-to-credit ratio. You can calculate yours by dividing the total amount of credit you have available into the amount of your debt. As an example of this, if you have $5000 in available credit and have used up or charged $1000 of it, your debt-to-credit ratio would be 20%, which is very acceptable. In fact, most experts say that your credit utilization or debt-to-credit ratio should be 30% or less. It has no direct impact on your credit score whether or not you carry a balance from month to month. The way that you would hurt your credit utilization is if you carry a balance and continue to add to it either because you’ve made new purchases or the interest on your balance has accrued. This is what hurts your credit score.
Is it because you protested the bill?
Have you balked at paying a credit card bill because you thought it didn’t reflect what you had spent? Or maybe you didn’t understand what your interest rate would be when you signed up for the card. If you think that by refusing to pay a credit card bill you’re taking a stand against the credit card issuer, you need to understand that things don’t work that way. If you’re the type of person that has that same sort of approach to other financial matters such as refusing to pay the utility company because you think you were billed incorrectly or ignoring payments on student loans that you took out for a degree you never earned? All this type of thinking will do is wreck your credit. Your accounts will be ultimately sent to collection and you could actually be sued. Plus, of course, this will cost you more in late fees and collection fees.
You’re just confused.
Maybe your excuse for having been late in paying a bill is because you just didn’t understand interest, finance charges or how promotional offers for credit cards work. This can leave you unable to pay the bills you receive. Before you sign up for a credit card, read the fine print. Understand if it has an annual fee, its interest rate and what you have to do per the agreement you signed. If you don’t do this, you could end up learning that you owe more than you ever thought.
Is it a problem with prioritization?
Do you have a problem prioritizing your bills? If you get a bill from your vet do you believe it’s more important than paying a credit card bill? Sometimes you just have to prioritize your bill paying to make sure you get them paid on time and that you don’t miss a payment. It’s typical for parents to make sacrifices for their kids but it’s important to understand the difference between sacrificing for them and risking financial ruin. While you might love to take them to Disneyland you won’t love it so much when the bill rolls in and you find you can’t pay it or when you’re ultimately forced to declare bankruptcy.
Stop making excuses
Regardless of what your excuse might be you need to stop making late payments on your bills. If it’s because you simply can’t afford the payments or you’re having a hard time prioritizing them, one good option is to go to a consumer credit counseling agency. It generally costs either very little or nothing to use the services of one of these agencies. The best ones are nonprofits. When you go to a credit-counseling agency you will have a debt counselor that will review your spending, your debts and your assets. He or she will help you develop a budget that would make it possible for you to catch up on your bills and start paying them on time. Or your debt counselor might recommend a debt management plan (DMP). This is where the two of you determine what payments you could realistically make on your bills. Your counselor will present your DMP to your creditors. If they sign off on it you would no longer be required to pay them. Instead you would send one check a month to the credit counseling agency and it will distribute the funds to your creditors. It generally takes about five years to complete one of these plans.
Paying your bills on time is critical
The harsh truth about bill paying is that it’s critical that you pay them on time. It’s even more important to not skip a payment. Lenders don’t like to take risks. If you don’t pay a bill on time or skip it altogether this will damage your credit score and make it look as if you were more of a risk to potential lenders. This will not only make it tougher for you to get new credit in the future but it will cost you more money in the higher interest rates you will be forced to pay.
Finally, if you’d like to learn more about credit reports and credit scoring, here’s a helpful video courtesy of National Debt Relief.