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Ever forgotten a bill and been hit with a costly late fee? Automatic bill pay can take care of your payments for you, saving you from that headache. Once it’s set up, funds are debited from your bank account or charged to your credit card automatically, which can save you time, stress, and (potentially) money. Still, there are some downsides to consider before you turn everything over to automation. Below, we explore what automatic bill payment is, its pros and cons, and how to use it effectively.
Key Points
• Automatic bill payment streamlines financial management, reducing time spent on bill-paying tasks.
• Automating payments helps prevent late fees and penalties from creditors.
• Consistent on-time payments can positively influence your credit profile.
• Risks such as overdrafts and unnoticed errors or fraud can occur.
• Regularly monitoring accounts can help you catch issues early and effectively manage your subscriptions.
What Is Automatic Bill Payment?
Automatic bill payment is a service that allows you to schedule recurring payments to be made automatically, typically from your bank account. Instead of manually paying each bill, the system deducts the amount owed on a preset date (usually the bill’s due date), which ensures your payments are made on time. In some cases, you may have the option to set up automatic bill payment using your credit card.
You can establish automatic bill payment in one of two ways:
• Through your bank: Many banks offer a service called “bill pay,” which allows you to set up and manage all of your payments from one account dashboard.
• Directly with the payee: You can set up “autopay” through a company, creditor, or service provider by providing them with your bank account or credit card information and authorizing them to make recurring withdrawals from your account.
However you set up automatic payments, it’s important to remember that, once activated, automatic payments continue until you modify or cancel them.
Advantages of Automatic Bill Payment
Automatic bill payment can simplify your financial life. Here’s a look at some of its biggest advantages.
Convenience and Time Savings
One of the most obvious benefits of autopay is convenience. Instead of remembering specific bill due dates, logging in to different websites, or sending paper checks through the mail, automatic payments allow you to “set it and forget it.” Having all your payments managed in the background saves time, which can free you up to focus on other financial goals, like saving or investing.
Avoiding Late Fees
Missing a due date then scrambling to make the payment isn’t only stressful — it can cost your money. Many lenders and utility providers charge late fees if you make your payment late. The rules and grace periods for late payments vary by company, but credit card issuers will often charge a fee if you’re as little as one day late paying your bill. Automatic payments solve this issue by ensuring bills are paid on time, every time.
Improved Credit Score Management
Payment history is the most important factor in your credit scores, accounting for 35% of your FICO® score. Automating bills like credit cards, mortgage payments, and car or student loans helps establish a consistent on-time payment record, which can have a positive impact on your credit profile over time.
Automatic bill payments can also help you avoid late or missed payments, which can negatively impact your credit. Once a creditor reports a late payment to the credit bureaus, it appears on your credit report and will stay there for seven years from the date you missed the payment.
Disadvantages of Automatic Bill Payment
While autopay offers clear benefits, it’s not without drawbacks. Automation can sometimes create new problems if not managed carefully. Here are some disadvantages to keep in mind.
Potential Overdrafts or Insufficient Funds
Autopay only works if you have enough money in your account. If you forget a payment is coming up and don’t have enough funds to cover it, your bank may temporarily cover the transaction and hit you with an overdraft fee (which average around $27).
If you don’t have overdraft coverage, the bank will decline any payment that exceeds your available balance and may charge a non-sufficient funds, or NSF, fee (often around $18). And since the payment didn’t go through, you may also get hit with a late fee from your provider or creditor.
To minimize this risk, you may want to align your payment dates with your income schedule or keep a small “cushion” balance in your checking account to cover automatic deductions.
Errors/Fraud May Go Overlooked
Because automatic payments happen behind the scenes, it can be easier to miss incorrect or unauthorized charges. Companies can and do make billing errors. If you’re not looking at your monthly statement, you could be overcharged for services or get hit with incorrect fees without realizing it. It’s also possible that a fraudulent transaction could go unnoticed until it’s too late to dispute it.
To avoid this issue, it’s important to monitor your bank and credit card statements to catch mistakes and potential bank fraud early, even after automation.
Forgotten Subscriptions
If you rely solely on automatic payments, you may go months without realizing you’re paying for things you no longer use, such as streaming services, gym memberships, or free trials you meant to cancel. Over time, these forgotten payments can add up to a significant sum, and put a strain on your monthly budget. This is another reason why it’s important to continue reviewing your bank and credit card statements each month.
How to Set Up Automatic Bill Payment
Setting up automatic bill payment is relatively easy, but the process differs depending on whether you do it through a company or with your bank.
To set up autopay directly with the service provider, you typically need to:
1. Log in to your account online or through the app.
2. Look for an option like “Payment Settings” or “Billing Preferences.”
3. Add a payment method.
4. Select the payment amount (such as minimum amount due, full balance, or a set amount) and payment date.
5. Review and confirm your settings.
To set up bill pay with your bank, the steps usually include:
1. Log in to your online or mobile banking account.
2. Navigate to the “Bill Pay” or “Pay Bills” section.
3. Add the payee (many banks have a list of common billers you can select from to simplify the process).
4. Set the payment amount and frequency.
5. Select the date you want the payment to be processed.
Example of Automatic Bill Payment
As an example of automatic bill pay, let’s say your gym charges $65 a month, but offers a $5 discount if you sign up for autopay. You agree and enter your bank account details in your online gym account. The gym automatically bills on the 15th of each month, so you can’t customize the payment date. Now, $60 is automatically deducted from your account each month — no reminders needed. However, it’s still smart to check your bank activity regularly and cancel autopay promptly if you end your membership.
The Takeaway
Automatic bill pay is a valuable financial tool for anyone seeking convenience, organization, and peace of mind. It can help you save time, avoid fees, maintain a strong credit profile, and reduce stress related to money management.
However, it’s not completely hands-off. Automation generally works best when paired with good financial habits, such as monitoring your online accounts, budgeting carefully, and reviewing statements for errors and unexpected charges.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
Do automatic payments hurt your credit?
Automatic payments, like manual payments, could hurt your credit if you pay your bills late or experience insufficient funds.
What is the difference between bill pay and ACH?
Bill pay usually refers to sending funds electronically. One common way that funds may be transferred (but not the only way) is via the Automated Clearing House network, which is known as ACH.
What is the safest way to set up automatic payments?
The safest way to set up automatic payments is to do so through your bank or credit card; it’s not recommended that you use your debit card as you’ll have less protection if there’s a problem. Also, check your balance and statements carefully to make sure you have enough money in the bank to cover your autopayments and also scan for any incorrect or fraudulent transactions.
Should I use autopay for utilities?
Whether you should use autopay for utilities depends on your situation and financial habits. If you know you’ll be able to cover the amount every month, it could be a real convenience. However, utility costs can sometimes fluctuate greatly, like the cost of heating a home in winter, which might cause pricing spikes and lead to your overdrafting. You want to be sure you can always afford to cover bills that are on automatic bill payment.
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