The High Price of Paying Late - How We Are Saving Money by Paying Early

The last few years have been financially difficult for my family. We've survived a job loss, unexpectedly high medical bills, and rising costs for basic necessities. As part of trying to get back on our feet financially, we've taken steps to cut our expenses, and create a realistic budget so that we can start rebuilding our savings and pay down our debt. Every few months, we take time to sit down and review our accounts and budget, to see if we can find additional ways to save. 

At the start of this year, I took a look back at how much paying some of our bills late last year cost us, and I was shocked. I discovered that we paid over $1,000 in 2013 for late fees that could have been avoided with better planning.

How Did So Many "Little" Late Fees Add Up to Such a Large Sum 
It really does seem impossible that a few late charges each month, as well as a few returned check fees, can add up to such a large sum, but it did. Where did all of these charges come from? Contrary to what you might expect, our credit card debt had nothing to do with these exorbitant fees. Even though we were financially struggling last year, I was careful to pay the minimum payment for all of our credit cards on time, so that we wouldn't incur late charges, as well as suffer an additional blow to our credit report. In fact, we've taken steps to significantly reduce the amount of our credit card debt, and are working to pay them off completely. While our family didn't have any late fees from our credit cards last year, according to Mental Floss, Americans spent $18 billion dollars on credit card late fees in 2011.

Paying Late is Costly, Even if the Delinquency Doesn't Appear on Your Credit Report

While many utilities report late payments to the credit bureaus, ours don't. So, on the months when we were having difficulty putting gas in the car to go to work, or some unexpected expense would come up, I would be a few days to a week or so late on paying for things like our phone bill, electric bill, water bill, auto insurance and so forth. Most of these entities charged us an additional 10 to 25% each time we were one or more days late. We also have several medical bills that we make payments on, but sometimes those have been late as well, and, they would also charge a late payment fee. Believe it or not, those charges can add up quickly, but these charges were less than half of the amount that we spent last year in late charges.

The Dark Side to Using a Debit Card - Hidden Charges, Overdrafts and Other Fees

In an effort to reduce our debt, we pay for most things with our debit card, which is connected to our checking account. So, when the card is swiped, the money comes directly out of the account. One would think that if you don't have any money in the account, or go over the limit, that the transaction would be declined, Sadly, with our bank, as is the case with many other financial institutions, that isn't always the case.

One painful financial lesson that we learned from last year is that some retailers, such as gas stations, only put a temporary hold or authorization on the account for $1. It can take several days for the actual amount to post to the account. If you forget what you've charged at such a retailer, and you have other payments that you've made, it's possible for your account to become overdrawn even though you have funds in the account at the time of the transaction.

Our bank goes ahead and pays the retailer, so there isn't a declined check fee with the retailer, but the bank charges us $35 each time that this happens, just as though we had written a physical check with insufficient funds on the account. These overdraft charges add up rather quickly.

We also incurred several ATM charges for using this debit card at ATMs that were not connected with our bank, or using it to get cash back during purchases at some retailers just because we thought it was a bit more "convenient" than driving to a branch of our bank at the time. According to Bankrate, we aren't the only ones that do this, as Americans wasted a total of 7 billion dollars in ATM fees in 2010 alone!

Adding it All Up 
Counting late fees for paying late on our utilities, medical bills, and auto insurance, as well as these overdraft charges, we paid out an additional $1,103.87 in 2013 that we could have avoided with a bit of better planning and by having a savings fund tied to the checking account as overdraft protection. When we reviewed our accounts and discovered how much we had literally wasted, it made us sick. As difficult as the past few years have been financially, that was a huge sum that could have been spent on paying down more of our debt, or boosting our savings fund.

Refining Budget Categories, Alerts, and Reviewing Accounts Frequently Can Save the Day 
While we have a spreadsheet where we record all of our income and expenses, and we review our budget every few months, we didn't discover the true cost of being late until we tried a free budgeting program that we found online. This particular program has several sets of categories for expenses, and it automatically tracks and categorizes all of your transactions from all of your accounts. It was only looking back over the course of the year with this software that we could see a complete breakdown of our late fees and charges for the year.

Now that we are aware of this issue, we are taking steps to review all of our accounts more frequently as well as take a more in-depth look at where our money is actually going. The particular software that we are using also has the ability to email and text us when we are exceeding our budget limits for specific categories, so hopefully we discover issues in our budget more quickly, before they add up to such a large sum.

We are also taking steps to further increase our savings so that we have a greater cushion in our budget for those unexpected expenses that seem to crop up all of the time so that we aren't "robbing Peter to pay Paul," and paying some of our bills late. Even if a late payment for a particular bill isn't reported to a credit bureau, we've learned that it can still be costly in fees, so it pays to be early rather than late.