Is Delaying Payment Until Last Minute Right for You?

by David Ning · 15 comments

Sometimes, what makes sense on the surface actually makes no sense.

I just scheduled my first ever mortgage payment, and I am pretty impressed with the simplicity of Bank of America’s interface. Choose the source account, schedule the date of delivery, the amount to be paid, and if you want to apply any extra to the principal. Click, click, and you are done.

The payment is now scheduled to be made on the same day payment is due, some two weeks from now. I know the majority of you don’t make payment until the day it’s due (hey, I just decided to do the same), since everyone knows the benefits: no interest free loan, better to keep the money with you etc. But is it really worth the hassle? Are you actually benefiting from schedule the payments at a later date? Here are five potential problems.

1. Forgetting it completely. There’s a small chance that you just forget to pay the bill, triggering all sorts of late fees. You don’t want that do you?

2. If you schedule all your payments, it could become a cash flow nightmare. This can happen if you have many bills that you scheduled a few weeks ahead of time and don’t keep track of them all. You can eliminate this problem by having a big cushion of cash in your checking account, but…

3. Interest? Really? Interest is one of the biggest reason why no one makes payment until the last minute, but it’s generally misunderstood. If you keep your money in your checking account, are you getting any interest? And even if you don’t, with rates at 1%, that’s less than $10 a month on a balance of $10,000. How much are overdraft fees if you forget one scheduled payment? The potential reward might not be worth the risk.

4. Scheduling creates artificial wealth. Why do most people spend more when they have a credit card? Because they can. Unless you have amazing memory and remember every payment you’ve scheduled, seeing a bloated account balance can potentially encourage you to spend more.

5. You need to spend extra time. Even if you are super organized and know exactly how much money needs to go out and have it optimized to receive maximum interest, is it worth all that time you spent thinking about, double checking, and managing the whole mess? The banks do it because they have billions of dollars moving around at all times, and it makes financial sense to have a team of people come up with mathematical models to optimize cash flow. For most individuals, we could probably use the same amount of time doing something more useful. (Coming up with passive income comes to mind).

Delaying your payment may makes sense on paper, but I urge you to try paying all your bills as they come. You may not think it helps, but having more time is so much more powerful than the pennies that you are gaining in interests.

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{ read the comments below or add one }

  • J Finance says:

    There are many so called financial experts and gurus who will tell you to never buy any big purchase out right. Why? The theory is that many high ticket items consumers want to purchase depreciate in value over time rather than appreciate. Namely cars, jewelry, clothes, etc. So it may be a good idea to actually finance these types of items and use the excess money for things that appreciate or will bring in money, such as investments and such. I found many good personal finance tips at consumerfinancetips.com

  • K I R K says:

    In the United States, if you make your regularly-scheduled MORTGAGE payment each month, it makes no difference whether you pay it ten days early, on the due date, or the day before the late-charge date. The month’s interest is calculated on the prior balance times the note rate divided by 12.

    This is NOT true for a credit card, auto loan, line of credit (secured or unsecured), or personal loan. Interest on those is charged on a daily-rate basis.

    If you pay your mortgage for 30 years on the last day before a late charge is imposed, you will still have it paid off when you make that 360th payment — just as you would if you had paid it ten days before the due date each month. This is NOT true for a car loan, for instance. If you make the payments just in time to avoid a late charge, after you make the 60th (or 48th or 72nd) payment, there will still be an amount due.

    Check your mortgage statements and you will see that each month the interest amount goes down a bit and the principal portion goes up — even though February has fewer days that January

  • I will never again give a faceless commercial entity access to my checking account. A customer disservice fiasco with Qwest made it clear, real fast, why that’s a bad idea — they glommed vast amounts of money out of my checking account without my permission, billed me wrongly, and it was six months before they gave the money back.

    The credit union advised me not to set up bill payments in this way, but instead to use the CU’s in-house bill payment system, which makes it easy to pay electronically and keeps control in your hands. The branch manager who tried to disconnect Qwest from my account said that allowing a creditor to debit your account from its end is asking for trouble, and that in his experience insurance companies were the worst — he said it was almost impossible to get an insurance company to quit engrossing nonexistent payments out of a customer’s account, even after the company had said in writing that the policy was canceled and payments would stop.

    Also, no way would I trust Bank of America to make those transfers on time. Setting the payment date on the due date virtually guarantees that sooner or later a payment will be made late…and guess who will get gouged for late fees.

  • Virginia says:

    I just wanted to share that Bank of America will allow you to make payments two times a month, but there is a fee of about $4.00 and what it totals to is just one more payment for the year. They said that it does not shorten the term of the loan, so what’s the point?

    • MoneyNing says:

      I wouldn’t pay extra to have that service, because I can very easily make the payments online if I wanted.

      I think what Bank of America means is that your monthly payment is still going to be the same, though you will have in effect paid off your mortgage faster than the original term.

      If you want to pay bi-weekly, I suggest making the regular monthly payment and adding the money towards principle mid month.

      For example, all you have to do is pay the monthly mortgage payment as usual. Then, divide that amount by 12 and pay online in the middle of the month and stick it to just principle. It works out to be about the same I’m sure, but you are always paying extra.

  • Atari Fun says:

    I pay bills as they come in. I still have a budget book listing the bill name, estimated amt, actual amount, date bill arrives, date bill due, date bill paid and a notes column. Everything is simplified and I look at the book about 1-2 times a week just to be sure I didn’t miss anything. As for mortgage, I am usually 1-2 payments ahead. I get paid 26 checks a year so I find that extra money is put to some use, having a mortgage cushion to me gives peace of mind. I also have short term savings of a few grand just incase and no cc debt or long term debt other than mortgage.

  • Cd Phi says:

    I love scheduled payments. They make life so simple..It’s one less task to worry about…and then all I have to do is check to see everything ran smoothly.

  • James says:

    timing is everything when it comes to bills, well that and paying the total amount.

    if you want to keep your credit score up and your house in your possession then you need to pay your bills on time and in the full amount, it’s that simple.

  • Jason says:

    I always pay my bills as they come. The way I see it, there’s no gain from having money in my checking account and I don’t have to worry about forgetting when the balance due always says $0.

  • JD says:

    The mortgage interest thing, and twice-monthly payment plan, is a good point as long as you know exactly how your mortgage lender is applying interest and your payments.

    I’ve read (maybe even her… or some other PF blogs) that some lenders let you sign up for the twice-monthly plan, but only apply the sum as a single payment once a month. If paying in advance truly applies against daily-accrued interest, then a mortgage payment makes sense to do a week (or three) in advance.

  • JD says:

    I use Quicken for just this purpose, though I’m sure any finance package would work. So I do two things differently:

    1. I pay the bill myself via my bank’s Bill Pay feature each month. I don’t give anyone “automated” access to my account. When I pay it, I schedule it to arrive a couple business days in advance of the due date. So it’s not too far in advance, but far enough that a glitch or outage can be addressed (assuming I’m notified). If I’m traveling or going to be away for a while, I can always go online and do this in advance.

    2. I then put it in Quicken with the future date on which it’ll be paid (I put the bank’s confirmation number in the Memo field). So there’s no “artificial wealth” issue because I always see two balances: the actual balance in the account at any given time and the “true” balance, which has already had those future payments subtracted. Those numbers are side-by-side in Quicken.

    It seems that all the arguments (except #3) in this could be addressed by personal discipline. I don’t do it because I think I’m getting extra interest or that sort of thing. I do it because I want to be proactive in managing my finances – it’s just not something I want to “set and forget”.

  • Jenna says:

    I try to always pay bills as they come in. It gives me peace of mind, plus you never have to worry if you misplaced your bills on a messy desk or counter top.

    I’d be interested to know how many of your readers use online bill pay. Or your thoughts on it.

  • John says:

    what Marci said in her second point is the real kicker… Interest is going to be accrued daily on your account, so the sooner you make your payment, the LESS interest your loan is going to accrue for the next month. So, you’re going to be paying more on principle than you would if you only wait til the last day its due.

    This is why the “bi-monthly” automatic payment option a lot of banks offer will actually reduce the total number of years it’ll take to pay off the loan. It’s somewhere in the neighborhood of 5 years early on a 30 year loan, just because you’re paying half of the amount due 2 weeks early each month.

  • marci357 says:

    I got stressed just reading what you did…. 🙂

    1. Give yourself a time cushion.
    One computer glitch at the bank that holds your money or the mortgage holder and your payment is late. Period. And it does happen.

    2. Is your mortgage interest daily or monthly? If daily, you are missing out on lowering your mortgage faster by delaying payment til due. And the extra principal you are putting down is delayed a day or so, which all adds up in the end.

    Just my thoughts. I don’t do stress 🙂

  • Mike says:

    This may just be my paranoia from my own experience; but, I prefer to pay my bills in advance. Why? It seems like waiting till the last minute might make you feel like you are winging it or cutting things to close to a deadline.

    Financial management, to me, is also partial peace of mind. So, I guess it makes to access how this affects one individually.

    Mike

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