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The National Foundation for Credit Counseling recently revealed a report that 24% of the adults surveyed said they did not pay their bills on time. This data was published on NFCC.org. It's okay to be a bit late occasionally as this won't wreck your credit. But if it becomes routine, you'll be damaging your finances several different ways.
For one thing, when you pay a bill late you're likely to be hit with a costly late fee. In turn this means you will have less money to cover your bills. Also, if you routinely pay your bills late your lenders may hike your interest rates or lower your credit limits. If you're more than 180 days late on a payment it gets worse. Your debt will likely be assigned to a collection agency or debt collector. When you have a debt that goes to collection, this will lower your credit score and stay on your credit reports for seven years. In a worst-case scenario, your wages could be garnished to pay that debt.
The simple answer to this is to set up automatic payments through your bank or through those companies that are billing you. This will eliminate the possibility you’ll make any late payments.
4. Paying only your minimum balances
If you are making just the minimum monthly payments on your credit cards it might be because you want to free up money for other expenses. But this is not a good financial move.
When you make just those minimum payments it’s like you're running on a treadmill where there is no end. This will dramatically slow down how long it will take you to pay off that credit card and will mean you'll be paying a lot more in interest. As an example of this, if you have a $5000 balance on a credit card at 16% interest and you make just a minimum monthly payment of $100, it will take you almost 7 years to pay off that debt. And it will cost you more than $3000 in interest.
When you pay just the minimum on a credit card that has a high balance you'll also be damaging your credit score. This is because a high balance increases your debt-to-credit ratio. This ratio accounts for 30% of your credit score. If you could lower your ratio by paying down that high balance you should see a nice boost to your credit score.
What can you do if you have balances on several credit cards? First pay as much as you can on the card with the highest interest rate, which will save you money over time. Alternately, you could do a balance transfer to a card with a lower rate or a 0% interest balance transfer card. This would consolidate all your credit card debts onto one card and you could then do everything possible to pay it down quickly.
5. Saving for your retirement before building an emergency fund
You've probably been told over and over that you must save for your retirement. But most financial experts say you should first build an emergency fund. Most say you should save the equivalent of six months of your living expenses. This could be tough, especially if you're young and trying to live on a small salary. So instead of six months try to save at least the equivalent of three months of your living expenses.
Why is this important? It's because something unexpected will happen to you – whether it's losing your job, getting sick, being in an automobile accident or having a pipe burst in your house. When something like this happens and you have no emergency fund, you might have to borrow money – which means creating new debt – or withdrawing money from your retirement account. When you do this your retirement account will not only take a hit but you'll have to pay income taxes on whatever amount you withdraw and probably a 10% early withdrawal penalty. You can avoid running up debt or raiding your retirement account to cover an emergency by lowering your retirement contributions and then funneling that money into a savings or money market account. That way when the unexpected occurs, which it will, you’ll be covered.