What Are Payments?
Payments refer to the transfer of money or services by someone to fulfill his obligations to another party. In the personal finance area, payments refer to money given to creditors by the borrower to pay back loans such as credit cards, mortgages and student loans.
When you borrow money, the creditor sets the terms for when your payments must be made. For example, a credit card company requires you to pay a minimum amount of your balance each month, which varies depending on how much you spend on the card, while a mortgage has a specified amount you're required to pay each month. Depending on the creditor, you may be able to make a payment in person, over the phone, by mailing in a check or by paying online.
Costs of Late or Missed Payments
Missing payments isn't cheap and it isn't limited to just the late fee that you see on your statement. According to CBS News, not only do you get slapped with a late payment fee, typically $35, but you also pay interest on the unpaid amount. Worse, if you fall behind 60 days or more, the credit card company can hike your interest rate to the "penalty rate," which increases the amount of interest you owe.
Credit Score Impact
Your payment history is heavily weighted when it comes to your credit score, so making on time payments is critical. Having a history of years of on-time payments makes you a better credit risk for future lenders, which can allow you to borrow money in the future at lower interest rates. But, if you have a history of missed payments, your credit score will fall and hinder your chances of being approved for future loans.
Automate Payments to Avoid Mistakes
Consider enrolling in automatic payments so that you don't have to worry about making the payments on time each month. It saves time and the hassle of setting up payments for each of your bills every month. However, if you do sign up for automatic payments, you must make sure that you have sufficient funds in your bank account to cover the bills. Otherwise, you could get hit with overdraft fees and interest on your checking account.