Boy, here’s a myth that needs debunking. Some people think paying bills until just before the due date will generate more money in the form of interest. The thinking is, “Why should I give (fill in the blank) the use of my money when it can be earning interest in my bank?”
Look closer
That may sound good at first, but let’s take a closer look. Suppose my electric bill arrives every month on the 7th and is due on the 30th. And let’s say the bill averages $80. I can either pay it when it comes in or wait to send payment until the 27th. If the money is coming out of my checking account, chances are the bank is paying little or nothing (right now, Bank of America in my area is offering .05 percent—that’s 5/100 of 1 percent for the decimally challenged).
If you hold that $80 for an extra 20 days at .05 percent, you will earn (drum roll) a small fraction of one cent. Even if you held the funds in your money market account (topping out at about 1.3 percent right now), you would earn 5.1 cents. And even a few years ago when the money market rate was 5 percent, those 20 days would net you about 20 cents.
Now let’s get real
All the numbers I just threw out are genuine but they mean nothing in this exercise. Why? Because once you delay the initial payment, you will be paying your bills every 30 days, just like the people who make payment as soon as the bill arrives. The table below helps illustrate:
And now for the harsh reality
If you pay the utility bills a few days late, there may not be any sort of penalty. But if you’re one day late on that VISA bill, there will be some very, very expensive late fees and interest charges. And if your $2000 mortgage payment comes in after the grace period, you’re looking at a 5 percent penalty, on average. In other words, you’re willing to risk the $100 late fee for 4.9 cents of interest at .05 percent.
Beyond the harsh reality
But wait, there’s more. Paying that mortgage or VISA bill late means your credit rating will take a big hit. You will become a financial second-class citizen since you will be perceived as a poor credit risk. That means you are now ineligible for a reasonable interest rate and other perks reserved for punctual bill payers. There’s also a downside for that day in the future when you need a favor from somebody you paid late. Do you think they’re going to cut you any slack?
Here’s something that will make a difference
Enroll in bill pay. Most banks offer it at no charge, and the financial benefit is no more stamps for your bills. Even if you pay only five bills a month, you’ll be saving over $25 a year in postage alone.
