Money Management Newsletter

Credit Series:  In a Bind...Which Bills Do You Pay First?

Dr. Jo Turner

Professor, Family and Consumer Economics

Many people find themselves in a bind from time to time.  The way they pay their bills will have an impact on their credit report and could harm them for years.   Even after the debts have been paid a poor credit rating could prevent someone from buying a car, renting an apartment or even getting a job.

If you find your self in a financial bind be very careful to avoid being 90 days or more late on any bill.  Some creditors write accounts off as bad debts and report your failure to pay to the credit bureau.  This can make it difficult to get credit in the future.  If you are juggling expenses, the list below should help you prioritize payments:

• Child Support.  It is critical to make child support payments.  By law, credit bureaus must report any information received about overdue child support, as long as it's verified by the proper agency and is not more than seven years old.  A bad credit rating may be the least of your worries.  Law enforcement agencies can intercept your tax refund, garnish your wages, put a lien on your property, and suspend your driver's license.  If you can't pay because of a financial crisis, you should go to court and see if you can get payments reduced.

• Mortgage.  If you are more than 90 days late on your house payments, it will probably end up on your record.  Mortgages also tend to have hefty late-payment fees, and if you miss two or more, your lender may start foreclosure proceedings.

• Car Loans.  You should not fall behind on car payments.  In some states, your car can be repossessed after only one missed payment.  If your car is worth more than you owe, you may be able to refinance your loan with lower monthly payments.  If not, your lender may agree to a temporary schedule of reduced payments.  Most of the major auto financing companies let a borrower with a good payment history and a reasonable repayment plan either skip a few payments or refinance.  Before calling to discuss alternatives with the lender, draw up a plan for getting back on schedule.

• Taxes.  The Internal Revenue Service (IRS) can be rough if you don't pay on time.  If you are notified that you owe past-due taxes, make every effort to pay as quickly as possible.  If you can't pay, contact the IRS to arrange a repayment schedule.  If you can't pay because of a genuine hardship such as major medical bills or lengthy unemployment, you can petition the IRS with an "Offer in Compromise" by which you repay only a portion of the total back taxes owed.  You'll need to seek the service of an accountant.

• Bank Credit Cards.  MasterCard and VISA cards are valuable references on your credit report.  Pay them on time, even if you only make the minimum payment.  Once you are able to pay all of your bills as they come due, make a plan to pay off the entire balances on all of your credit cards.  It is very costly to carry over balances from month to month and can lead to serious problems

• Department Store Cards.  Most will accept lower payments for a few months.

• Utilities.  Utility companies may be willing to work out a modified payment schedule for a short period, if you can't pay on time.  But you may have to put up larger security deposits for future services.

• Student Loans.  Federal student loans may be deferred if you are having financial problems.  If your loan is deferred, you won't be required to make payments, but you can't qualify for deferment once your loan is in default, so don't wait until you are behind in payments to apply.  Continue making payments until your request is approved.

• Medical Bills.  Most medical bills aren't reported to credit bureaus until they are sent to collection agencies.  You can probably work out a payment schedule with the doctor or hospital.  Just be sure to confirm any agreements in writing and ask for confirmation that reduced payments won't be reported to the credit bureau.

• Small Bills.  Set aside small bills, such as magazine subscriptions and book clubs, but be sure to contact the creditor if you can't pay the bills now.

Until you can pay all of your bills on time, STOP using credit of any kind.  Remove your credit cards from your wallet and cut them up.  Also STOP trying to borrow yourself out of debt.

 Look for additional income by getting a second job, or a job with more pay.  Use your hobbies and skills to produce extra income.   Sell some items you no longer need such as that second or third car and apply this money to reducing your debts.

If you are thinking of consolidating your debts, remember you will have smaller payments over a longer time period and it is usually more costly.  With consolidated debts people often think they have more money and soon find themselves back in the same situation again.  You may want to consider a home equity loan.  If, however, you get a home equity loan or a consolidated loan, pledge to yourself that you will not use credit in any form until you have completely paid of the loan.  If you get into debt trouble again you could lose your house.

Last but not least think about the problem you are having paying bills and use this as an opportunity to learn from your mistakes.  Resolve to make some changes in the ways that you handle money to see that such problems never happen again.