What Bills to Pay When You’re Really Strapped for Cash

This is the first article in a series I’m releasing to help recent graduates (or anyone out on their own for the first time) navigate the dangerous waters of personal finance. These are all tips I wish someone had given me when I graduated from college, but like many, I had to learn the hard way. This series will be broken up into separate articles that I’ll release over the next week or so and, if you’re anything like me, no one has ever told you this stuff before and, if you learned it, you probably did so the hard way. On to the good stuff…

My God college is expensive! Like a lot of my friends, I was broke as a joke in college. I got some help from my family and student loans, but I also held a part-time job and used credit cards to cover some of my expenses. I’m sure most of you reading this have gone through times when you were pretty tight on cash; if you haven’t, I can tell you as an expert in being broke, it’s no fun at all! The problem is, and I outlined this a bit in The Credit Debt Spiral, anytime cash is short, you’re teetering a lot closer to the edge of bankruptcy than you may think. However, with some little nuggets of knowledge, you’ll know what to do if times get tough; I mean, let’s face it, it’s no fun to plan for a fire, but when that blaze is roaring, you’ll be thanking your lucky stars you mapped out your escape route ahead of time.

Prioritize Your Bills

So, in the event that you can’t pay all your bills, you need to know what to pay and what to hold off on so you can still eat until you get your finances back in order. Make sense? Great.

First of all, ditch the utility bill. A lot of these financial people will tell you that the most important thing after your mortgage is that you have heat and electricity for your family. Sure, problem is, most utility companies won’t cut you off if your a month or two late on the bill, in fact, I once went 5 months without paying my bill before they threatened to turn off the electric. They’ll send you a notice shortly before they decide to shut off the utilities, and this is one case where procrastination can help you.

You should hold off on any phone bills as well, but be prepared to pay them quickly if you get a notice of cancellation. The phone company usually won’t shut off your service if you’re only a month or two late, especially if you call them and tell them your situation and that you’re going to pay the bill in a week or so. Again, they’ll send you a notice before they shut off your service, or call you, which will give you a perfect opportunity to negotiate a future payment date in exchange for keeping you connected.

The utility and phone bills won’t affect your credit report, so don’t worry about lowering your credit score due to late payments. (Note: I did see a utility bill show up on a client’s credit report once before, so if you’re going to do this, you need to find out whether your utility and phone companies report to the credit bureaus).

The 30 Day Rule

Any bills showing up on your credit report should be paid before they’re 30 days overdue. Late payments on any credit account won’t be reported to the credit bureaus as late unless the accounts are at least 30 days overdue, so that should give you a little bit of extra time to get caught up. Be careful with this; if you let your accounts go over 30 days past due, your credit score will drop and your report will note that you were 30 days late (or however late you were). If you try to get another credit card in the future, the bank may not like this too much. If you’ll be looking to purchase a house or refinance in the future, the only lates the bank will care about are mortgage lates, so, other than lowering your credit score, late credit card payments alone won’t affect your ability to get a mortgage.

So what’s left? Your mortgage or rent. I’ve been late on rent several times in the past and, my landlord, a decent size company, didn’t serve a “Notice To Pay Rent Or Quit” until day 20 or so. If your landlord is just some guy you know who rents a room in his house you may have a little more leeway, but in my case, I would have had more time to get back on my feet had I owned a home; albeit, not much more time.

If you own your house, you absolutely must ensure that you don’t go 30 days or more overdue on your mortgage! You can go right up to 29 days if you want, but you’re in for a world of hurt if you go 30 days or more overdue. If your mortgage is 30 days or more overdue, it’ll show up on your credit report and affect your ability to purchase or refinance a property for the next year or more, depending on your credit history. Here’s why: banks are pretty strict on late mortgage payments; if you have even one late mortgage payment in the past 12 months, you’ll automatically be classified as a “sub-prime” borrower, and we all know from my article on subprime mortgages that you don’t want that. If you’ve had a bankruptcy in the past 7 years, those 12 months are extended to 24 months.

Keep in mind, these are all band-aid solutions, meaning they only address the symptoms, not the illness. You can only get away with not paying your bills for a limited time and, once that time is up, you’ll have to come up with the money or really kill your credit. I did all these things when I switched jobs and had $5,000 stolen from me, but only because I knew I’d be back on my feet in a month or so.

Bills You Can Usually Get Away With Not Paying for a Few Months

1. Don’t pay the utility bill until you get some sort of notice of cancellation [time-frame: 3 months]
2. Don’t pay your phone (cell or land-line) bill until you get some sort of notice of cancellation [time-frame: 3 months]
3. Don’t pay any other bills until they are coming up on the 30 days overdue point [time-frame: 29 days]
4. Don’t pay rent until they threaten to toss you out
5. Don’t pay your mortgage until it’s 20 days or so late (but for God’s sake, make sure the bank gets the payment by day 27 or 28 so they have time to process the payment) [time-frame: 20 days]

Related Articles:

What’s the Point in Paying Points?
Facing Foreclosure? Follow These 4 Simple Steps.
The Monthly Mortgage Roundup
How Long Will My Loan Last?
Mortgage News - AM Edition - Saturday, June 07^th, 2008