Families Taking Charge: Deciding Which Bills to Pay First · higher‐interest credit card balance...

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FamiliesTakingCharge:DecidingWhichBillstoPayFirst

RevisedByCeliaRayHayhoe,Ph.D.,CFP®,FamilyResourceManagementSpecialistWhatdoyoudoifyourcurrentincomejustisn’tenoughtopaymonthlyexpensesanddebts?Puttingyourbillsinastackandpayingthemuntilthemoneyrunsoutwon’twork.Youhavealegalobligationtopayallofyourcreditors.Notpayingbillswillaffectyourcreditreportandcreditscore.Itcaneveninvolvecourtaction.Notpayingsomebillsmayhavegreaterconsequencesthannotpayingotherbills.Whenyourincomeisreduced,yourspendinghabitsmustchange.Thesooneryouchange,themorelikelyyourfinancialproblemscanbelessened.Takechargebysettingprioritiestomakesurethebasicneedsofyourfamilyaremet.Thinkingaheadcanminimizethelegalandeconomicriskswhenyoucan’tpayallyourbills.

WhoGetsPaidFirstFirst,youneedtoknowwhatyourdebtsandmonthlyexpensesare.UsetheSettingSpendingPrioritiesFactSheetinthisseriestodeterminethisinformation.ThenusetheBillPaymentWorksheetonthenextpagetosummarizewhatyouowe.Leavecolumnsblankthatdon’tapply.“BalanceDue”isforthingslikecarloanswhichyouarepayingoffoveraperiodoftime.Itistheamountlefttopayontheloan.AnnualPercentageRate(APR)istherateofinterestyoupayonloansandcreditcardaccounts.LookfortheAPRonmonthlybillingstatementsorinthepapersyousignedtogettheloan.ThehighertheAPR,themoreinterestyouarepayingonyourdebt.Don’tforgetpaymentsmadequarterly,semi‐annuallyorannually.Thisincludesthingslikeinsuranceandtaxes.UseyourMonthlySpendingPlanandOccasionalandSeasonalExpenseWorksheetfrom“SettingSpendingPriorities”tobesureyou’veincludedallpayments.Thetotalforthe“AmountDuePerMonth”ontheBillPaymentWorksheetwillnotbethesameastheexpensesontheMonthlySpendingPlanbecausethingslikefoodandgiftsarenotbills.Youmayfindthatyouneedtomakemoreadjustmentsonyourspendingplan.

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BillPaymentWorksheetWhoYouOwe/Nameandaddresstosendpayment

AmountDuePerMonth

DateDue

AmountOverdue

BalanceDue

APR(InterestRate)

Whatwillhappenifyoudon’tpay

ExampleCreditCard000StreetAnytown,USA

$50 3rdofeachmonth

$100 $2,500 25.99% Notsecured,creditorcalls,maylowercreditscore,creditormaycloseaccount,turnoverforcollection,orfilealien.

Total

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Decidewhichdebtswouldresultintheworstconsequencesforyourfamilyiftheyweren’tpaidorwerepaidlessthantheamountdue.Askyourselfthequestionsbelow.Whatwillaffectmyfamily’shealthandsecuritythemost?Usuallythehouse,utilities,food,transportationandmedicalinsurancetakepriority.Foodandgasmaynotbeonthisworksheetbuttheyareonyourspendingplan.Don’tforgettoleaveenoughmoneytocoverthem.Yourcarpaymentwillbeonyourbillworksheetbuttheamountforgasandcarmaintenancemaynotbe.Don’tbetemptedtoletmedicalinsuranceslidewhenmoneyistight.Ifanyoneinyourfamilybecomesill,uninsuredmedicalcostscouldbedevastating.Payhigh‐prioritybillsorcontactthecreditorsatoncetoworkoutsmallerpayments.(SeeVirginiaCooperativeExtensionpublicationon“HowtoPreventForeclosureonYourHome”ifyouarebehindonyourhousepayment.)Whatwillyouloseifthebillsaren’tpaid?Youcanloseyourpurchasesifthecreditorholdsthetitleofthepropertyassecurityfortheloan:ahomemortgageorcarloan,forexample.Sometimesfurnitureandlargeapplianceloansaresecuredloans.Ifyouaren’tsurewhichloansaresecured,checkthecreditcontract.Unsecureddebtsmayhavetotakelowerpriority,althoughyouareobligatedtopaythemtoo.Howmuchdoyoustilloweontheloan?Determinehowmuchyouhavepaidoneachloanandhowmuchyouowe.Ifyouhaveonlyoneortwopaymentslefttomakeonaloan,it’sprobablyagoodideatofinishpayingit,gettingthatdebtoutoftheway.Youmaybeabletoreturnneweritemsorsellthemtopayoffthedebt.Ifyouchoosetovoluntarilysurrendertheitem,you’llstillberequiredtopaythedifferencebetweenthemarketvalueoftheitemandtheamountremainingontheloan.Butgettingoutfromundersomeofyourdebtscanreducethepressureyoufeel.Whatinterestrateareyoupaying?Ifyouhavealoanwithalowerinterestrate,youmaydecidetopayoffahigher‐interestcreditcardbalancefirst,toreducetheamountoffinancechargesyouarepaying.Putcreditcardsawayinasafeplacesoyouarenottemptedtousethem.Closingtheaccountswillhurtyourcreditscoreandtheinformationaboutthecardwillstillstayonyourcreditreportevenifyouclosetheaccount.

Isaconsolidationloanagoodidea?Personalfinancecompanieswantyoutothinkso,butgenerallyaconsolidationloanchargesahigherinterestrate,often36percentormore.Ifyoucanqualifyforonefromabankorcreditunion,youwillpaylessinterest.Refinancingtosmallermonthlypaymentswillalsoextendthenumberofpaymentsyoumustmake,addingtothetotalcost.Whileasingleloanmaymakepaymenteasier,that’sasmallbenefitconsideringtheadditionalcosts

involved.Ifyoudogetaconsolidationloanusetheextramoneytopaytheloanofffaster.Watchoutforprepaymentpenalties.Aprepaymentpenaltywouldcauseyoutopaymoreifyoumakeextrapayments.Also,don’tbetemptedtogooutandmakemorepurchasesoncreditcardswithnobalance.

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Whataboutyourcreditreport?Nonpaymentofbillsisrecordedonyourcreditreport.Yourcreditscorewillbelowerandthiscandamageyourabilitytogetcreditinthefuture.That’swhycontactingallofyourcreditorsimmediatelyifyoucannotpayyourbillsisimportant.Ifyoucanpaysomethingoneachdebt,it’slesslikelythatyourproblemswillbereportedonyourcreditreport.

YourRepaymentPlanOnceyouhavecalculatedhowmuchmoneyyouhaveformonthlylivingexpensesandforpayingoffyourdebts,

decidehowmuchyoucanpaytoeachcreditor,basedonprioritiesyoudeterminedwhileansweringthequestionsabove.Workoutarepaymentplanthatshowshowmuchyouplantopayeachcreditor.Putthisplaninwriting.

Nowyouarereadytocontacteachofyourcreditorstoexplainyoursituation.You’llneedtotellthemhowmuchyouareabletopayandwhenyouwillbeabletopayit.ThefactsheetTalkingwithCreditorsthatispartofthisseriescanhelp.Somebusinesses,suchasutilitycompanies,havespecialcounselorsforcustomerswhocan’tpaytheirbills.Thesecounselorscanhelpyousetupabudgetplantoevenoutyourpayments

duringtheyear.Theycanalsotellyouifyouqualifyforfuelassistanceoranyavailableprograms.

LooktotheFutureRemember—nomatterhowbadyoursituationmaybe,don’tignoreyourbillsandcreditors.Promptactionisveryimportant;letyourcreditorsknowyouarehavingtroubleBEFOREyoumisspaymentsandthesituationbecomesworse.Onceyouhaveaplanforpayingbills,sticktoit.Contactanycreditorsyoucannotpay.Offertopayonlytheinterest,arrangeforalongerperiodoffinancingormakeminimumpayments.Avoidtakingonanynewdebtforfamilylivingexpenses.Whenyouhavereduceddebtstoamanageablelevel,startaregularsavingsaccount.Buildanemergencyfundtohelppayunexpectedexpenses.ReferencesBoelter,Linda.“DecidingWhichBillstoPayFirst.”CooperativeExtension,UniversityofWisconsin‐Extension.1990.Bills.”HomeEconomicsCooperativeExtensionService,OklahomaStateUniversity.1989.OriginalPreparedby:IreneLeech,AssociateProfessor,DepartmentofApparel,Housing,andResourceManagement,VirginiaTech.Reviewedby:CristinSprenger,ExtensionAgent,FamilyandConsumerSciences,FamilyFinancialManagementPublicationsChairKimberlyCardwell,ExtensionAgent,FamilyandConsumerSciencesL.DawnBarnes,SeniorExtensionAgent,FamilyandConsumerSciencesFamilies Taking Charge is a multi‐part series for individuals and families experiencing financial stress as a result ofdifficulteconomictimes.ContactyourlocalExtensionOfficeforcopiesofotherpublicationsinthisseries.