Which Late Account Should You Pay First?

Do one thing: If you know you will be late with a payment, call your lender to let them know about the situation and to find out what options you may have.

How to Prioritize Late Payments

It’s a situation no one wants to find themselves in. Money is tight because you lost your job or a major source of income and fell behind with some of your bills. It happens. More than a million Americans had their positions cut from the workforce in the U.S. last year. 

Paying Bills Strategically

As you take steps to get back on your feet, it’s time to figure out the best plan to stay afloat financially. One way to manage the situation is to strategically pay your bills – including the late account notices that may be starting to roll in.

Hierarchy of Payments

The thing is, there is a hierarchy of how you should potentially pay your accounts, as you weigh which ones may impact your credit (and living situation) the most.

Certified financial planner Chris Diodato, founder and CCO of WELLth Financial Planning, says the first accounts to pay are the ones that have the highest consequences if missed. In other words, you should try to cover the things you need to survive before paying for anything else.

Which Bills to Pay First

Here are the top things Diodato and others suggest paying for first when you are late paying the bills:  

1. Rent or Mortgage

Having a safe place for you (and your family) to live is vital, says Diodato. So first, make sure you can cover the rent or your mortgage payment, so you don’t face losing your home. A lack of shelter is more detrimental to your life than any late fees, charge-offs, or collection notices, explains Diodato. 

2. Car Loans

If you don’t own your car outright and are still making payments, you don’t want to have it repossessed, especially if you live in an area without reliable mass transit.

• Having a vehicle to get to work or to go on job interviews is pretty much non-negotiable outside of big cities and in rural areas.
• Plus, it only takes one missed car payment for a lender to legally be able to repossess your vehicle in most states, according to Edmunds.
• While many companies will wait until a payment is at least 60 days past due, you’ll want to reach out before then to let the lender know what’s going on.

3. Property Taxes

Making sure you pay your property taxes is also key to keeping your home, says Diodato.

• Mortgage Payers. Those who pay a mortgage usually have the taxes already baked into the payments.
• Paid Off Mortgage. But those who have paid off their home loans and don’t have a monthly note typically pay property taxes once a year, depending on the laws of the state and county where the home or apartment is located.

4. Utilities 

Your must-have utilities include:

• Power/Electric
• Water/Sewer
• Phone
• Natural gas, if it’s used to heat your water.
• Some include internet access on this list because it’s difficult to find a new job if you are searching online from home and don’t have adequate internet access.   

How to Handle Utilities

Just as with your other bills:

• Call your utility providers to let them know why you are late with the bills.
• Ask if there are any hardship options
• Check for any payment deferment plans available. 

Consider Paying These Bills Next

After making sure your most critical needs are met, you can consider prioritizing other late payments by taking a few other factors into account, such as:

1. Your credit card bill with the highest interest rate
2. The bill with the worst late penalty

Avoiding Credit Score Hits and Collections 

Certified financial planner Lucas Wennersten, CFA, who is founder and owner of 49^th Parallel Wealth Management in the U.S. and Canada, says when you have accounts that are past due, you should try to keep them from going to collections if at all possible. 

Collections

When a bill goes unpaid for long enough and goes into collections, that means:

• A service provider or lender has given up on trying to collect a payment themselves
• Sent it to a collection agency or sold it to a company that “buys” debt.
• Collections damage your credit score and stay on your credit reports for seven to 10 years, depending on the type.

Make Minimum Payments

If collections are looming, try to pay at least the minimum amount due on cards. “Make the minimum payment if possible to keep them out of collections,” notes Wennersten. “Once in collections, communicate with them to try and find a settlement. Your credit should pay collections in full, but you may be able to get the account settled and out of collections earlier with a settlement.”

Prioritizing Collections Payments

If you find yourself with more than one extremely late bill that falls into collections:

• Focus on one collection at a time
• Try to pay off the smaller collections first
• Each collection that falls off your credit report is beneficial