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HOW DO I MAKE PAYMENTS?

What are Your Options for Making Bill Payments?

Making regular, timely payments on the bills you owe is probably the single most important component in developing a robust credit history and healthy credit score.

Unlike years past, however, today there are many ways to do that – ranging from cash to electronic fund transfers (EFT).

Cash Payments

Yes, Virginia, there is still something called cash.

While apparently falling out of favor as more consumers and businesses gravitate toward a plastic-only, purchase-and-pay lifestyle, cash can still be king. For one thing, some financial experts recommend freezing (literally) your plastic use (debit and credit) when trying to minimize spending and getting debt under control. Because it is a limited resource (many think twice about buying a $7 latte when they only have $10 on hand), cash is a good tool to curtail frivolous or unnecessary spending.

But it does have its drawbacks. Increasingly businesses are moving to a plastic-only payment model (for example, you can no longer use cash to buy snacks or drinks while inflight on airlines). You must go to the bank or ATM to get it and you must travel to the institution you owe to make the payment. That’s time, and money, spent getting there. And while there is no need to reconcile receipts against bills every month, there is also no record of payment unless you request it. Remember, too, that travelling with a wad of cash leaves open the potential of losing your wallet, or having it stolen. If you are a cash-is-king type of person, don’t flash it around in public.

One last, but important item to consider when using cash-only to make purchases – you’re not building a credit history or score when you do. If you want to remain debt free you can still make purchases with a credit card, pay the balance off every month by the payment due date, and build a solid credit history and score.

Check Payments

Next to cash, using checks used to be the way to pay. As more people embrace the idea of online bill pay, they may also potentially go the way of the dinosaur.

When making payments by check, it is crucial to always remember never to “over draft” your account. What does that mean? Make sure you have enough money in your checking account to cover all checks you write – when you write them. If not, your check(s) can bounce and that means overdraft fees drawn against your account each time it happens. You will also be charged a “returned check” fee by the company to whom you wrote the check. It used to be there was something known as “floating a check,” which represented the time lag between when you wrote a check and when it was cashed. With the advent of electronic fund transfer (EFT), check cashing is nearly instantaneous and thus “float” has virtually been eliminated.

To make payments, you must fill out the check, sign it, and mail or hand deliver to the institution or business you are paying. Once received, the business then deposits your check into their financial institution’s account. That institution sends the check to a regional processing center of the Federal Reserve, which forwards the check to your financial institution where the amount is deducted from your checking account and remitted to the vendor back through the Federal Reserve. Again, with the advent of electronic banking, this process takes much less time – in some cases less than 24 hours.

To successfully use checks, you must carefully record every deposit and each check written for bills, etc. While you should always reconcile your checking account balance each month, you should also record every deposit when you make it and every check when you write it. This helps keep track of the exact cash available in your account. At the end of each month you must compare your financial institution’s statement against your personal record of payments to ensure both have the same information and balance on hand.

Money Orders

Some people may not have the resources or funds to open a checking account (there can be fees to do so, as well as monthly balance requirements and check printing costs). Or, they may have had a checking account closed in overdraft and been reported to a “bad check bureau” such as ChexSystems. Most financial institutions and banks query a “bad check bureau” before opening new checking accounts to limit overdraft losses. Sometimes it happens the business from which you are making the purchase doesn’t accept checks. If you don’t have a credit or debit option to fall back on, you may want to consider a money order.

Money orders are purchased in exact amounts and accepted in place of cash. Be sure the amount you pay is the same amount printed on the money order. You don’t need a checking or savings account to get one. Just exact cash. They can be obtained from a number of places, including banks, the U.S. Post Office, Western Union, check cashing stores, and grocery stores. They are usually limited to a maximum of $1,000, and should be made out to a specific amount. Always immediately fill in the name of the institution you intend to pay. While they typically do not have an expiration date, it is wise to deliver the money order for payment as soon as you acquire it.

Bill Payment

At the other end of the bill paying spectrum is online bill payment. What exactly is that?

Simply put, it simplifies things by automating your bill payments. You can set up an online bill paying account with your bank of financial institution and arrange to have them pay your regular monthly bills out of your checking account. Of course, this doesn’t mean you don’t have to physically do anything; it just lessens what you have to do each month.

Initially you must set up an online account according to your financial institution’s requirements (and that can vary from one to the other). Then you must input each of the businesses you wish the bank to pay and your account numbers with them. Once that’s complete, you can begin paying bills online.

Each month as the bill comes in, you log on to your account, input the amount you want the bank to pay, and then approve. Viola! The money is electronically transferred via the Automated Clearing House (ACH) Network. ACH can actually transfer money in two ways: as a credit (described above) or as a debit (see the Automatic Debits section below). You can also create automatic monthly payments for specific accounts which are then paid the same amount on the same day each month.

An alternative to paying your monthly bills this way is to have the fixed ones (such as car payments, mortgages, cable, etc.) charged to a credit card(s) and then to pay them off monthly. There are some disadvantages to this method:

  • Costs: You are responsible for ensuring you have enough available credit on your card to cover these charges. If not, your credit card issuer will decline the charges and the companies you are paying may charge you a fee.
  • Mistakes: While the system is automated, mistakes can still be made such as paying the wrong amount, or not paying at all. Always be sure to check your bills and payments to ensure they correspond.
  • Stop Payments: While the initial set-up does take some time, stopping payments can be very time consuming considering you must notify the merchant to stop processing the monthly charge. If they continue to do so after you’ve requested that they stop you will need to dispute the charges with your credit card company. If your credit card gets stolen, you’ll need to order a new card and immediately switch over all automated payments.

The biggest advantage is probably convenience, followed by helping your credit score. Paying bills on time not only improves your score, it can help keep it high. You can also rack up reward points when you charge recurring bills to your credit card, and because you aren’t sending individual payments to numerous vendors using stamps or gas to do so, you’re also saving money.

Automatic Debits

This automated electronic process, also provided by ACH, enables funds to be taken directly from your checking account. You don’t have to write a check, get a money order, or use your credit card. Instead, you provide permission to merchants or businesses to automatically remove money from your account to pay bills.

If that gives you pause, you’re not alone. When you set up these payments you can do it in one of two ways:

  • Automatic: Money is withdrawn from your account by the biller when the bill is due. Because the biller takes the action, you don’t do anything beyond initially approving access to your account.
  • On-demand: Create the link between your account and the biller, but pay the bills yourself rather than authorize vendor access (see Bill Payment section above).
  • Obviously, there is a huge convenience factor with automatic debits, but that doesn’t mean it isn’t without pitfalls. There is many a consumer advocate and organization who warn against using this process. Why? Because it means handing over your account number and access to someone else.

    Additionally, it’s also easier to lose track of your balance if you’re not checking it regularly. That can lead to bounced checks and overdraft fees and both can be very expensive. Plus, if you don’t check regularly, you may forget you’ve cancelled a fixed, monthly service. Your biller, however, will still faithfully send automatic debits for payment until you physically take the steps to stop it.

    Bank or Wire Transfers

    You can send money via bank/wire transfers in three ways:

    • Online – log in to your account and follow transfer instructions
    • Telephone – Call your bank and use their telephonic process or use a mobile app
    • In-branch – go to your bank branch and fill out forms

    Regardless of which platform you choose, you need to provide some general information, including:

    • Recipient’s name (person or business)
    • Recipient’s account number
    • The receiving bank’s routing number
    • Payment reference consisting either of your name, customer number, or reason payment is being made
    • Date payment should be made

    If you need a payment to arrive same-day, check for any applicable deadlines. Be aware, same-day may also generate additional fees. Your bank will ensure that you have sufficient funds in your account to cover the wire transfer (and any fees). If you’re conducting an in-branch transfer, bring photo id and your bank account info with you.

    There is also the option to use companies which specialize in money transfers, such as Western Union, and do not require formal accounts. They can, however, be quite expensive and may not offer the same protections and guarantees you might otherwise receive from a bank. As with using any service, be sure to research your options thoroughly and make sure they are sufficiently regulated before handing over your cash.

    What do I do if I’m unable to make a payment?

    First things first, BREATHE!

    If you are unable to make a payment, you should contact your creditor for two important reasons. First, many creditors allow customers to pay only the interest portion of their monthly payment at least once during any given 12-month period. If you are already past due 30 days or more, your account will be transferred to the creditor’s collections unit. Once your account is in collections, you will begin receiving letters, emails and phone calls from them to collect payment. Whether they call you or you call them, they will often accept partial payments, record a promise from you to pay a mutually agreed upon amount by a certain date, or they may even be willing to waive a portion of your past due balance if you pay the remaining amount. This last scenario is called a settlement. You will receive a 1099 from your creditor for the waived or settled amount at the end of the year in which you received it. The settlement amount is taxable income and you will need to report it on your state and federal tax return.

    The second important reason you should call your creditor when you’re unable to make a payment is that creditors track the number of days payments are past due. Their systems maintain a count of the number of times customers have been 15, 30, 60, 90, 120, 150 and 180 days past due over the life of a loan. The accrued past due amount and the number of times you were past due is reported monthly to the three main credit reporting agencies, Equifax, TransUnion and Experian. This information negatively impacts your credit history and score.

    If you are chronically unable to pay back loans, you should consider contacting a not-for-profit credit counseling agency. Learn more about credit counseling agencies here.

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