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What bill do I pay first?

Posted by admin on March 17, 2009 in Investment Information

If you have less cash than your monthly expenses, what bill would you make a payment on first? Does paying one type of bill have a greater implication on your credit report and credit score than paying another type of bill?

Here are some major factors to consider in prioritizing which bills to pay first.

SOME BILLS HAVE IMMEDIATE IMPACT ON CREDIT REPORTS AND CREDIT SCORES

Not paying your bills on mortgages, credit cards, student loans and other types of bills which usually required a mandatory credit check before obtaining these types of loans/bills tend to have the largest and most immediate impact on your credit report and credit score (a credit report is a history of your past borrowing and dealings with certain creditors; a credit score is a numerical expression up to 900 of your credit worthiness with the higher the number the better).

For this reason, these types of bills should be ideally on some type of pre-authorized electronic/online payment so that they are automatic and, in this sense, receive the highest priority.

For those with upside down mortgages (where the mortgage is now worth more than the home), here is an interest article on the implications of defaulting on your mortgage. The most important issue to know is whether you live in a jurisdiction that allows the lender to pursue the borrower personally after a home is sold as part of a power of sale/foreclosure proceeding since you have the double disadvantage of a default showing up on your credit score and are still liable for the remainder of the loan.

Other creditors which do not usually require mandatory credit checks to open accounts tend to have less adverse and immediate impact if you are delinquent. These include phone and cell phone bills, gym membership, magazine subscriptions etc. Non-payment of these bills may eventually end up on your credit report but it may not be as more immediate  (which is not to suggest you should deliberately pay late or default on payment).

INTEREST AND PENALTIES

This topic has been discussed many times in other blogs but any bill which has high interest rates and penalties (10% or over) should ideally be paid in full or, otherwise, it is difficult to ever begin paying down the principal and you enter into a debt spiral.

For this reason, credit card bills and tax bills should be paid immediately and in full in an ideal world. Non payment of taxes is especially problematic given, in some jurisdictions, it is easy for the government, relative to the typical creditor, to garnish wages from your employer.

SHEER PRACTICALITY

You need a roof over your head, power in your house and a phone (either land or cell). In other words, you need to pay for the necessities of life no matter what. You don’t need a gym membership, a subscription to magazines and newspapers and both a land and cell line.

Having said that, what I did find interesting was that last year I read an article that some homeowners were paying their credit card bills and not their mortgages. If nothing else, an interesting observation about how even our homes have become mere commodities in modern life.

SOME OUTSTANDING BILLS SURVIVE BANKRUPTCY

Depending on where you live, student loans, support payments and outstanding taxes will survive even bankruptcy. Thus, keep in mind that, even in a worse case scenario, you cannot wipe the slate completely clean and some bills payments should be made no matter what. To understand which obligations survive bankruptcy, it is prudent to see a lawyer familiar in this field or a trustee in bankruptcy who will give free consultations for those thinking of bankruptcy.

… and, in the event you cannot pay your bills, I previously posted on dealing with collection agencies. Good luck.