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Americans Not Paying Bills on Time — and Why That’s Bad

Credit Score, Personal Finance
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Americans Not Paying Bills on Time — and Why That's Bad

Paying your bills on time can save you money. You’ll avoid late payment fees and penalty interest rates, and also maintain or build good credit, which can help you get approved for favorable loan terms.

Yet, many Americans — especially those in their 20s and early 30s —  struggle to get their bills paid on time, according to a recent study by the National Foundation for Credit Counseling. Here’s what you need to know about the importance of keeping up with your bills, as well as tips to make sure you don’t miss your due dates.

Many consumers are missing deadlines

Roughly 1 in 4 U.S. adults don’t always pay their bills on time, according to the NFCC’s 2015 Financial Literacy Survey, sponsored by NerdWallet. Among U.S. adults ages 18 to 34, just over half are paying their bills on time and have no accounts in collection.

It’s crucial to credit health to pay your bills on time and avoid having your accounts sold to collection agencies. These go hand in hand: If you’re paying your bills as agreed, none of them should go into collection.

Why it’s so important to pay your bills on time

Late payments can result in late fees, increased interest rates and a damaged credit score. Let’s dive into that last problem, which can affect your ability to obtain loans at the best possible rates and limit your options for years to come.

A good credit score is important for many reasons. While you may know that excellent credit can get you the most favorable terms on future loans, you might not realize that it can also get you approved for utilities and new cellphone plans, as well as affordable car insurance. It can also mean that you get approved for an apartment that you otherwise wouldn’t have gotten.

There are several different credit scoring models, but the most widely used are FICO scores and VantageScores, based on algorithms developed by the Fair Isaac Corp. and the three major credit reporting bureaus, respectively.

Payment history is the most important factor of your credit scores, and having 100% on-time payments puts you in the best position to have healthy scores. While a payment made a day or two late probably won’t be reported to the credit bureaus, you should aim for on-time payments all the time. Keeping your card balances at 30% (or preferably less) of your available credit also has a powerful effect on your scores.

How to deal if you’ve missed payments

If you’re struggling to make payments because you forget the due dates, consider setting up automatic payments or having email/text reminders sent to you a few days before your due date. If you lack the financial resources to make your payments on time, start by considering how you can earn more and spend less. If your financial situation is dire, check out our tips for getting help when you’re deep in debt.

When dealing with past late payments, it’s important to keep perspective. Even the worst financial mistakes will eventually fall off your credit reports and stop hurting your credit scores, provided you start making good credit decisions now.

What can I do now?

If you’ve had trouble with late payments in the past, the best time to start building your credit back up is now. Use our tips above to start paying bills on time. Create a debt payment plan to knock out your existing debt balances — which will give you fewer accounts to make payments on from month to month.

Perhaps most important, don’t beat yourself up for past mistakes. Not only will late payments fall off your credit reports in around seven years, but over time they’ll likely affect your credit scores less and less.

This article was updated Aug. 25, 2016. It originally published April 29, 2015.

Erin El Issa is a staff writer at NerdWallet, a personal finance website. Email: erin@nerdwallet.com. Twitter: @Erin_El_Issa.