How Late Payments are Costing Your Client

If you have ever knocked over a full can of paint while painting your house, you know making a huge mess can take only a second, while cleaning it up can take hours. You might have a friend or client who doesn’t pay their bills on time and considers late fees an acceptable annoyance. They are on that ladder, and the paint can is about to tip over. They just don’t know it yet. 

Advising clients like these gives you a chance to offer them financial planning. Once a client sees the value you can add in this aspect of their lives, they may be more receptive to additional financial planning services.

The Risks of Knocking Over the Paint Can

Your client might think that making a service provider wait for payment is no problem, but it can cost them in ways they probably haven’t considered:

  1. The late fee. When someone pays their cable TV bill or trash collection bill late, they might see a “late fee” notification on their next bill in the range of five to $20. Your client might see this fee, but be unbothered by it.
  2. Credit card late fees and penalty rates. If your client carries a revolving charge card balance, the credit card company might charge $35.00 for this. While it’s annoying, your client is probably putting up with it. The credit card company might be charging 16 percent, which is about the average. If your client misses even one payment, the company might apply the penalty interest rate, which currently averages a whopping 28 percent. This can happen when your client is 60 days in arrears, which is only one or two missed payments. The credit card company does need to notify a party before applying the penalty rate, but once a client is “in the naughty corner,” getting out can take a while.   
  3. Lapsed insurance coverage. Your client may have bought term life insurance, and the company is expecting the client to make payments on a regular basis. The policy might have a grace period of 30-90 days, but if your client stops making payments, the policy lapses, and the insurance is no longer in force.
  4. Defaulting on a mortgage. Mortgage payments are expected to be made on time, although there is usually a 15-day grace period. If your client misses two payments, they may be in default on their mortgage, and the mortgage company will definitely be in touch about it. If 90 days pass without any payment, the company may warn your client that foreclosure proceedings will begin in 30 days if the issue is not addressed. In other words, 60 days without payment or two missed payments may be enough to put your client into default, and 120 days or four missed payments can prompt foreclosure proceedings.
  5. Property taxes. People who own real estate are expected to pay property and school taxes. In some places, there is a small discount for paying early, and a 10-percent penalty for paying late. If your client’s property taxes are paid through their mortgage company, this might not be a concern, but if they pay property taxes themselves, the penalty can be a large number.
  6. Federal taxes. No one wants to get into trouble with the federal government. The late payment rate is 0.5 percent per month that the payment is overdue, and up to a maximum of 25 percent. Meanwhile, any outstanding balance is accruing interest at the federal short term rate, plus 3 percent.

The Indirect Costs of Being a Late Payer

In addition to throwing away money by not paying on time, skipping payments or making late payments can also be risky.

  1. The credit score. FICO scores include payment history, and about 35 percent of the score is based on it. Damage to your client’s credit score can impact their ability to borrow money in the future.
  2. Job applications. Companies can sometimes request to see a version of an applicant’s credit report, which shows payment history. This may be especially relevant if your client works in a profession handling money. A history of poor credit can be a liability when seeking their next job.

How Can Your Client Address This Problem?

Here are three easy steps your client can take:

  1. Review their credit score. This information should be easy to access. If something looks or seems wrong, have your client contact the reporting agency and ask how a correction can be made.
  2. Setup online bill payment. Most companies would prefer to be paid through an automatic debit from a checking account. Some companies even charge a premium for processing personal checks. Your client is responsible for making payments on time; they can’t blame the mail.
  3. Prepay bills. Your client’s property tax bill might include a small discount as an incentive to pay early. Have your client take advantage of this opportunity, especially in the current environment of low interest rates. Other bills, like homeowners’ insurance or prescription drug plans, might offer the opportunity to pay the year’s premiums up front instead of paying on a monthly basis, which becomes one less bill to worry about.

Making late payments might not seem to be a big deal to your client, but it can cost them in ways they haven’t imagined.

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