Always Pay (at least) the Minimum to Avoid These

If you’ve ever paid a late fee to any lender you know how frustrating it can be. If you are in good standing with the institution and usually pay on time, it’s wise to call them and ask for the fee to be forgiven as they will often do so. But by setting up automatic payments – even if only for the minimum, you can avoid all of the following with your lending institution:

Late Fees	These can run $20 or more and you’ll incur it every time you don’t pay at least the monthly statement minimum.
Penalty APRs	Credit cards (for example) have a variable interest rate. When you pay your bill late, you may get an interest rate increase.
Damage to Your Credit Score	Unpaid minimum payments will be reported to the credit bureaus two or three weeks after the original due date. So you’ll not only incur a late fee, you’ll also see a significant drop in your credit score (negatively affecting future interest rates and borrowing options).
Collections Agencies	Unpaid minimum payments that are 180 days old can be “charged off” which means you can expect calls from collections agencies and a very bad mark that will stay on your credit report for seven years. Yikes!

Avoid these Fees with Your Checking Account

Nearly as important to avoid are these two fees associated with your funding account (i.e. the account you use to pay your debt payments):

Overdraft Fees	If you authorize a payment to your lender for a certain amount, but that amount isn’t available in your account, your account will be overdrawn and you’ll incur an overdraft fee, often $30 or more. Note that many banks have cut or eliminated overdraft fees. If your institution hasn’t, it may be worth finding another banking option.
Minimum Balance (a.k.a. “Maintenance”) Fees	Some banks require a minimum balance to be kept in your account at all times. When you fall below that threshold, you may be charged a fee, often $10 or more.

There are many accounts across a variety of institutions that don’t require minimum balances. Alternatively, some banks will waive the requirement if paycheck direct deposit or other conditions are met. Ideally it’s best to pay debt from an account that doesn’t require a minimum balance. This makes it easier to look at your balance and instantly know how much you can allocate to a debt payment without having to remember your minimum balance requirements.

There are also banks that offer the option of “overdraft protection.” This is a line of credit that gets automatically activated when a check, debit card transaction, or wire transfer attempts to withdraw more money than is available in the account. This can be useful. However…it can also mean you incur additional debt. You may not even realize you did it. Generally speaking, be weary of “overdraft protection.” Investopedia covers this topic in more detail. But your goal should be to monitor your accounts and ensure you don’t overdraw them in the first place.

How to Set Up Automatic Payments

Most of the time you’ll be able to set up automatic payments via a recurring transfer directly from your lending institution’s website or mobile app. You need to set the following:

• A Linked Payment Account: This would typically be your checking or savings account. Your payment account may be at the same institution as your lender (e.g. you have a Chase Checking account and a Chase credit card) but you can also set up an external payment account with another institution. To do this, you’ll need to provide the account number and routing number (the routing number can always be found on your institution’s website).
• The Payment Amount: You can set the payment amount for one of the following:
  • Minimum – your payment will always be made at the minimum statement balance, which is typically the higher of $25 or 1% to 3% of the total statement balance.
  • Fixed – your payment will always be made for whatever fixed amount you set (e.g. $100, $500, $1,000 etc.).
  • Statement Balance – your payment will be for the full amount on your statement. This can be a good option if you know you can always pay your full balance every month without overdrawing your funding account.
• The Payment Date: Set your automatic payment up for sometime between one week after it comes out and one week before it’s due. This ensures you have time to review the statement before paying but still have a buffer in case holidays or weekends butt up against your bill due date.

Pro Tips

Pro Tip #1 – Paycheck Payments

If you get a regular paycheck, consider setting up multiple automatic payments that coincide with when you’re paid by your employer. For example, if you’re paid twice monthly or every other Friday, you can set up payments accordingly. The benefit is that on these dates, you know you will always have money in your funding account.

Pro Tip #2 – Multiple Payments

If you are carrying a revolving balance (e.g. credit card balance), the interest on this balance compounds daily. By making two payments at different times of the month (for half the amount you would otherwise pay once per month), you are more quickly reducing the total balance on the account and lowering the total interest you would otherwise owe. This saves you money.