Paying Your Bills Last Minute - Utilizing Grace Period and Float
May 9, 2005
Cap -@- StopBuyingCrap.com
Recently a friend of mine, who doesn't use online banking
very much, saw that I was scheduling some payments to be made. He noticed that I
was scheduling a payment that's due about a month later, to be paid 2 days
before the due date. He asked me why I did that and he quickly regretted -
because I wouldn't shut up afterwards.
What I do with all my bills is that I pay them at the very
last possible minute. Credit card bills, utility bills, you name it - if I can
pay it at the very last minute before I'm penalized, I do it.
Some of you know why I do this, some of you don't.
Basically, I'm utilizing grace period and float times to my
advantage. Grace periods are the period of time in which financial charges are
not incurred on a credit card. Realize though that grace period only comes into
play when you make your payment in full for the previous month (and in the case
of some, two months or two statement periods).
www.webster.com has a good definition on float for this particular usage:
“The time between a transaction (as the writing of a check or a purchase on
credit) and the actual withdrawal of funds to cover it.”
Grace period and the ability to “float” are in my opinion
some of the best benefits of using credit cards. Another example where I use
both to my advantage is when I pay my cable and wireless bills. Let’s say both
my Time Warner and Verzion Wireless bill closes on May 20th, and both
bills are due June 10th. I can pay on June 8th with my
checking account, OR I can pay with my credit card, which further lengthens the
actual time the cash are withdrawal out of my accounts.
Some people hate borrowing money, and hate having a debt
loom over their head. I understand that completely. It can become quite
bothersome, and at times you worry about paying late, thus receiving a big smack
on fees and penalties (not to mention hurting your credit for late credit
payment).
One reason why I still do this though is because I'm cheap,
and I want to make $2.30 by paying at the very last minute.
Take this month's American Express Blue bill of mine, which
will be around $1,200. The statement will close on May 17, and the bill will be
due around June 12. When the statement closes, I'll schedule a payment of
$1,200 to be made on June 9 online. (Payment takes about 2-3 days to process)
This 23 day period in which no interest will occur (due to the grace period),
will let me earn a petty $2.30 in interest if I keep the $1,200 in my ING Direct
account earning 3% interest.
Now some people will think I'm silly for doing this for
$2.30 but you should take into the account that, if I do the same thing for the
rest of the year and assuming it’s the same amount of bill, that’s $27.60!!
Okay, still nothing to scream about, but $27.60 is better than $0. Yes these
are taxable interest income, but again, it’s still better than $0. In reality,
what I earn in interest is much more than that.
The obvious problem with paying all your bill at the very
last minute... is if you spend too much, you might not enough money to pay your
bill. If you pay late, you may even incur large late fees. Worse yet, if you
had an introductory low rate, that may be gone... or your original interest rate
may hit default rate.
Given the risk, why do it? Well as I've mentioned, this is
to teach myself money management skills. This requires me to be on top of my
every income and expense. If you ask me on any given day, I will be able to
tell you how much money I have in my savings and checking and I'll also be able
to tell you how much is owed on each of my 6 credit cards, the spending limits
left on each cards, and when each cards are due.
These days, paying your bills at the very last minute is
made much simpler by online payment services. Most major bank chain provides
online bill pay service, and more and more are reducing or taking away the fees
that use to be associated with them. (It’s been shown that if a bank has free
Online Bill Pay, people keep more money in the checking account) Most utility,
cable, and phone services also have online payment ability too. What I do in
these instances is find out which online service process faster, so I can pay as
last as possible. One good example is my Time Warner bill pay. If I submit a
payment on Time Warner’s website to pay my bill, it takes about 5 days before
the payment is processed. If I utilize my credit card’s bill pay service, the
same payment takes 2 days to process.
Another major reason why I do this is so that I have more cash
available to me between the time when bills are due, and the time my
paycheck/income arrives. I know the amounts mention above may not seem
worthwhile, but what I gleam from doing this is well worth it to me. As you
income, expense, and net worth increase... the same will occur when you take
advantage of grace period and float times available to you. The banks do this
all the time, they want to decrease actual float time as much as possible, so
they have more time to use your money before they have to “give it back” to you.
This is a good time though to point you towards the
disclaimer, since paying bills late is definitely a no-no.
Besides the interest earned and cash flow freed; each time I do this I get a
better understanding of my financial budget and picture. Each time I schedule a
payment, plan for future expense, I get a better look into what I spend on and
how much I have available to pay for it. At the end this results in better
financial literacy, and that’s definitely something worthwhile to me.
Edit: On the flip side, it's often said that millionaires don't borrow
their way to their wealth. Debt, in any form is a no-no. In that
respect, everything I mentioned is just silly and a waste of time. Spend
below your means, save portions, and invest the rest. No need for these
silly credit games.
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