When times are tough and you can’t find the money to pay all of your expenses, where do you turn and how do you decide who gets paid? Of course, in a perfect world we would all have sufficient emergency funds to cover these types of situations, but many people are faced with this question every month and don’t have the money saved up. While you may incur late charges or possible dings to your good credit score, there are priorities you can set to ease the pain as much as possible.
1. Housing comes first. This is especially true if you own a home. Your mortgage payment should be at the top of the food chain. Your home provides shelter, it is one of your greatest assets, and it is a great mark to have on-time mortgage payment history on your credit report. Above all, make sure you are making those payments. It wouldn’t make sense to go into default because that cell phone bill you just paid required your mortgage to be paid late. Your housing expenses should also include any insurance, which may be part of your mortgage payment anyway. If not, it should be a top priority as well.
2. Don’t forget taxes. I’m not just talking about Uncle Sam, but this includes property taxes as well. If you are employed, chances are you are already paying taxes on a regular basis, but if you are under-withholding you could be faced with a steep tax bill at the end of the year. Your best bet is to have the right amount taken out of each pay check, but if that isn’t possible or you find yourself owing taxes, don’t delay in filing or paying. The same thing goes for property taxes. Failure to pay can put a lien on your home.
The penalties are stiff, and the IRS has no problem garnishing your wages or taking property to get their money. The good news, at least with the IRS is that they do have options available to assist when you can’t pay your taxes. Using an installment plan or reaching an agreement with them should be a last resort, but they are options.
3. You better make those car payments. The next item in line, especially if you require it to get to work every day, is your auto loan payments. Again, this is a secured loan, which means if you fail to make payments on time, not only can it affect your credit, but they can recover the property. Losing your primary means of transportation could cost you your job if you don’t have an alternative. Without a job, you’ll never be able to pay the bills. If being unable to pay your bills is a recurring theme, this is one of the first places to look at cutting costs by finding a cheaper vehicle. Auto insurance should be lumped in with any loan payments and considered just as important.
4. Begin looking at credit cards. Once you have secured your essential payments for your housing, tax obligations and transportation, you can begin looking at paying those credit card bills. Obviously, you want to stay current with these so you can keep your credit report clean, interest rates low, and avoid late fees. Don’t jeopardize your home or other things listed above just to try and avoid a late fee or negative mark on your credit score.
If you do have money left over to put toward credit card bills, pay at least the minimum. If it takes minimum payments on 4 different cards just to make all of the payments, then do that. It is better to only pay the minimum and keep the account current than to try and pay more and end up short on another card and have a late fee tacked on.
If you don’t even have enough money to make the minimum payments on all of the cards, you have to prioritize. First, realize that if you can’t make the payments, you’re going to be late and there are consequences. The best you can do is try and limit the negative impact. First, check to see if there are any grace periods on any of your cards. You may be able to squeeze a few extra days until payday and still avoid a late payment. If that is of no use, you’re probably going to want to look at the card with the highest balance. The reason is that if you’re late, they are likely to increase your interest rate. 29.99% on a $5,000 balance hurts a lot more than 29.99% on an $800 balance.
Finally, remember that late payments typically aren’t reported to credit bureaus until they are over 30 days past due. You may still have a late fee or a change in interest rates, but if you’re a few weeks late you’ll probably still keep that credit report free of a late payment mark. And, if it is your first late payment with that issuer, a phone call may actually get the fee removed or the rate dropped back down. Unfortunately, if you make this a habit, don’t expect any relief.
5. Utilities are often the last resort. You may think that keeping the lights on would be a top priority, but in reality you have the most latitude in making payments compared to the rest of the things on this list. First, many utilities are optional and aren’t a necessity to life. Things like the cable and telephone are good examples. If you fail to make your cable payment, they shut it off and possibly report it to the credit bureaus. Losing cable is better than losing a home or having your wages garnished.
When it comes to the more important utilities, such as electricity, sewer, water, or gas, you will want to try and make these payments, but doing so late might not be as bad as being late on a credit card. Most electric or gas companies have very low late fees, and in some cases it may just be a couple dollars. On top of that, it generally takes an extended period of being late before service is actually shut off. The best thing to do if you find you are unable to pay the electric or gas is to call your provider and explain the hardship. Most offer assistance or special payment plans for those in financial need.
When it comes to something such as sewer, you may actually have to place more importance on that bill. In some places, being late on your sewer bill could eventually result in a lien on your property, so be sure to check and see if that applies. But with most utilities you’ll pay lower late fees than you would on a credit card and they are much more flexible when it comes to being unable to make payments, so most utilities should be one of the last items to pay.
As always, you should be trying to make all of your payments on time and in full, and this shouldn’t imply that it is good practice to make late payments, but the reality is that there are times when that just isn’t possible and you have to make the best of it. Also, keep in mind that these are just general guidelines. If your situation involves alimony or child support payments or such, these could take priority given the legal implications, so you have to analyze your situation carefully.
In the end, if being unable to pay your bills is becoming a regular habit, it is time to sit down and think about why this is and make some changes. The occasional emergency happens, but when it happens every month and every year, you need to really take a look at your situation to get out of that rut.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.