Paying bills on time saves money and helps build credit: Part 2

There are numerous ways to pay bills. Know your options and the pros and cons of each.

Start building a good credit history by paying your bills on time! Why is credit history so important? Your credit history can affect a variety of things including the ability to get a job, rent an apartment, insurance premiums and the cost of future credit (i.e. a mortgage or auto loan).

The previous article in this series, reviewed paying bills by check or cash. This article will highlight additional payment options identified by the Consumer Financial Protection Bureau (CFPB): paying bills by online bill payment, automatic or direct debit and paying by credit card.

1. Paying by online bill payment: This is a service that you sign-up for at your financial institution, in which you provide them with merchant information and your bank/credit union makes the payment based on the amount and schedule that you select.

  • Pros: Reduces chance of late payments, can be scheduled as a one-time or recurring payment, convenient, easier to show proof of payment or stop unintended payments.
  • Cons: Takes time to learn the online system, there is a chance of overdraft (and corresponding fees) if you schedule a payment and there isn’t enough money in the account to cover the purchase, and lastly if you schedule a recurring payment for a bill and the bill amount changes you run the risk of short paying the merchant which could lead to fees and a partial payment report to the credit bureau.

2. Paying automatic or direct debit: You provide a merchant with your checking account information and they withdraw funds from your account when your bill is due.

  • Pros: Convenient, free, reduces chance of late payments, and you may get a lower interest rate on loans if you pay in this manner.
  • Cons: There is a chance of overdraft and corresponding fees if you pay by automatic debit and there isn’t enough money in the account to cover the payment.

3. Paying by credit card: You are only able to borrow up to your approved limit, and you will pay interest on any un-paid balance that you carry from month to month. Be sure to understand the terms and conditions of your credit card carrier, including any potential fees.

  • Pros: Can make payments over the phone or online, can arrange automatic payments, and can help build your credit history if payments are made on time and you don’t get too close to your credit limit (i.e. to help build your credit score try not to charge more than 30 percent of your approved credit limit).
  • Cons: If you cannot pay your credit card balance in full every month this method will cost more than paying with cash or a check, and this can lead to debt since you are borrowing money to pay for bills.

In closing, there really are a variety of options for paying your bills on time. The key is choosing the option that works best for you. In the end, bills paid on time save you money and help build your credit history. For additional information on bill payment methods visit the Consumer Financial Protection Bureau (CFPB).

Michigan State University Extension offers financial literacy and homeownership workshops throughout the year to help you become financially healthy. For more information of classes in your area, please visit either the MSU Extension events page or MI Money Health website. Additionally, you can take the Financial Health Survey at MI Money Health to access if you’re financially healthy and discover more ways you can improve your financial health. 

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