Paying Bills: Does Waiting Make Sense?

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For years, savvy consumers have held out until the last minute to pay their monthly mortgage bill. Consumers like the “interest-free loan” aspect, and there’s something to be said for having the money — and not the bank. But there are some downsides, too, that could give you pause before you play the last-minute deadline game.

We’re not talking about homeowners who are struggling financially, and who may not be able to make their mortgage payments until it’s almost too late. Those homeowners may be among the 337,837 homeowners who received a foreclosure notice in April, according to RealtyTrac. The same goes for credit card holders who wait until the last possible day to pay — chances are, they just don’t have the money to pay and have to scramble to come up with their credit card payments before their monthly deadline, thus risking a big interest rate hike by paying their bill late.

No, many consumers play with fire by choice. With bank-sponsored automatic payment plans, these consumers can schedule a mortgage or credit card payment on the last day of the month, thus giving them — and not the bank — the use of their money for the entire month. Thus, you’re essentially getting a free loan for 30 days by waiting until the last minute to pay your mortgage or credit card bill.

But there are some possible drawbacks. For starters, if you don’t remember to schedule your payment, you risk paying late, thus incurring the wrath of the lender and severely damaging your credit score. If you pay early in the month — say on the 10th — forgetting to schedule a payment isn’t a big deal. You still have three weeks to make your payment on time. But if you normally schedule your payment on the 30th or 31st of the month, and forget to do so, you’re looking at a 30-day late payment and the dire financial consequences that come with a late payment.

Then there are payment penalties — usually associated with mortgages. Consider JPMorgan Chase (Stock Quote: JPM). Mortgage holders with Chase face a mid-month deadline to pay, or they’ll incur a late payment penalty (about $75 on a $350,000 mortgage). True, you can still pay on the 30th of the month without worrying about being officially late on your mortgage, but by being penalized $75 or so, you’ve probably negated any interest-free loan advantage you might have had by paying on the last day of the month.

Then there’s the “tsunami” effect of weighting your mortgage and credit card payment at the end of the month. Your cash flow picture will take a serious hit if you overload payments at the end of the month (or on any specific day of the month, for that matter). Your cash flow picture improves when you schedule payments on different days of the month, thus avoiding a big chunk of money disappearing from your bank account on one single day.

This is not to say that paying at the end of the month is a bad idea — it’s just a risky one. If you can pull it off without incurring any fees and penalties, go for it. Just be organized and know that your margin of error is extremely thin — and that the fallout for missing a payment can harm your credit rating.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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