Can Missing Just One Payment Affect Your Credit Score?

Confession: I missed a payment on my Banana Republic store card back in my early 20’s. I simply forgot to mail in the check and it continued to haunt me for years to come. Not only did I get slapped with a $25 late fee (plus interest), the tardiness stained my credit report and cost me precious FICO points.

When I went to apply for a mortgage a few years later, the loan underwriter wanted an explanation for that late payment. [Never mind that my credit score had recovered nicely and that I had never missed a payment since.]

Needless to say that one misstep was costly and embarrassing.

But it taught me a number of lessons, most notably that, for me, my best bill payment strategy was to automate as many bills as possible, all to eliminate the risk of missing payment deadlines.

I also reckoned that many store cards are not nearly worth the initial 20% shopping discount they boast if you end up carrying a balance.

I’m willing to bet that many of us, like I, have a late payment story or two…or possibly several. If you look at the behavior of Mint users, alone, during the first half of this year nearly one in five missed a credit card payment. The strange thing, too, is that many of these late payers had enough money in their accounts to pay their bills. The culprit? Forgetfulness.

In a perfect world, we would automate all our bills, free of fraud concerns and financial constraints, and have ample cash in the bank to cover our expenses.

But forgetfulness, a lack of organization and for many, not having sufficient funds, can get in the way. More than half of Americans (55%) are living paycheck to paycheck, spending as much as we make each month, according to a 2014 Pew study.

If you’re struggling to figure out your ideal bill pay “system,” here are some suggestions – some tech-driven, some more old-fashioned. The good news is, there’s not really a wrong method for paying your bills, so long as it ensures you do so on time every time.

Link Payments to a Credit Card

I’ll begin by sharing with you my personal bill payment method. I pay almost every possible bill I can – from Netflix to my nanny’s salary – with my credit card. The charges come through at various points throughout the month and land on my credit card.  My credit card, in this way, acts like my central payment center. Then on the 25^th of every month my credit card receives automatic funds from my checking account to fulfill my month’s balance.

In effect, my cash doesn’t leave my bank to pay any of my bills until my credit card knocks on my door and asks me to pay up towards the end of month.

This payment works best if:

• Many of your bills can be paid via a credit card.
• You know you’ll have sufficient funds in your bank account towards the end of the month to reconcile your credit card bill in full every time.
• You seek a very streamlined system that takes advantage of automatic bill pay.

To help you stay on track

Pay Throughout the Month

If the above strategy makes you nervous because you’re not always sure you’ll have sufficient funds in your bank account to pay your entire credit card bill each month, consider a system that has you paying each bill as it comes due.

Admittedly this method takes more effort to ensure you never miss a payment, since a typical household may have more than a dozen recurring bills (e.g. utilities, housing, cell phone, taxes, student loans, car payment, subscriptions, insurance, etc.). There are many deadlines to keep track of.

For this strategy you’ll want to use a trusted web calendar where you can highlight when bills are due. Preferably this calendar also lets you assign alerts to yourself so you always know when bills are coming due. Google Calendar lets you do all of this and share your bill payment due dates with others.

If it’s a bill you can pay electronically, then setting the alert a day or two before the due date could suffice. If it’s a bill that you need to pay via snail mail, give yourself at least a one-week head’s up. (And be sure to keep reading for specific advice around an overall snail-mail bill pay method.)

One bill I always place in my calendar is my disability insurance premium. For some reason, I cannot pay it electronically. The insurer only accepts checks. It’s due once a year and if I miss it, I’m totally ruined because then the whole policy shuts off. It’s kind of scary.

This payment system could be for you if:

• You don’t want to risk running short of cash at the end of the month before needing to pay your bills at once.
• You want a system that leaves with you a real time sense of how much cash you have on hand after each bill gets paid – so you don’t overspend on other things.
• You’re really organized.

New from Mint – Bill Tracking

Mint is currently rolling out even more features to help users stay on top of their bills. Remember that stat I shared earlier on Mint users and missed payments? Well they took notice and are releasing the functionality to help people avoid this money trap.

If you’re currently a Mint user, keep an eye out for the new Bills section of the product. You can link your utility bills, rent/mortgage payments, and even offline payments to your Mint account and it’ll help remind you of what’s due and when.

This payment works best if:

• You feel like your billing system is all over the place and need some help getting organized
• You’re stressed about whether or not you have enough money to cover your upcoming bills (allows you to see what else is coming up)
• You want someone else to “remember it” for you

When Snail Mail Works Best

According to CreditCards.com one in four Americans aren’t completely sold on the idea of mobile payments with security and privacy being the number one concern (64%).

If you, too, are skeptical of online bill pay or just prefer doing things the old-fashioned way (or simply can’t pay certain bills electronically like my disability insurance premium) then load up on envelopes and stamps and gear up to mail in your payments.

Just be sure to leave ample time to place a check in the mail prior to the bill’s due date. Keep an eye on your bank account to make sure the payment goes through. If you notice the payment has yet to be collected and the due date is nearing, follow up with the vendor as soon as possible to avoid getting slapped with a late fee. If for some reason your check gets lost in the mail, you can sometimes pay over the phone at the last minute and avoid any late charges.

This tactic could work well for you if:

• You’re just not willing to automate.
• You can carve out time every week (or every few days) to review bills as they arrive online (or in the mail) and promptly send payment.
• You’re good with following up and checking your bank statement to verify if and when bills got cleared.
• You keep a nice stash of stamps around.

Good Bill Behavior For All

Here’s some parting advice that I think is important for all of us to practice, regardless of which bill pay route we take.

• Sign up for paperless statements. Even if you don’t like to automatically pay your bills, consider at least going green with your statements. You’re free to check your bill payment status online, as well as the breakdown of your bill whenever you want. This saves clutter and it’s really good for the environment.
• Review your bills throughout the month as they come ready. Check for overcharges. Don’t pay more than you have to.
• Keep sufficient funds in your checking account. This means you’ll have to become familiar with how much your bills amount to. Some are exactly the same every time. Others will vary. Keep track of your spending and, if it helps, keep a minimum amount tucked away in savings equal to the total of all your monthly bills so you never run short.

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at [email protected] (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

Source: mint.intuit.com