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How AutoPay Works & When to Consider Using It

April 22, 2020 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

How AutoPay Works & When to Consider Using It

Life is busy and sometimes, you miss a payment on a credit card or bill. You may curse and kick yourself, but the occasional flub happens to the best of us.

It doesn’t help that bills aren’t always due on the first of the month. You may have rent due on one day, the gas bill on another, and a credit card due on a completely different day.

For many people, a solution is to set up automatic bill payments through an automatic payment system, typically referred to as “autopay.”

During a time when technology can sometimes overwhelm and frazzle us, autopay may have the opposite effect. Automatic payments could help us accomplish a chore without even thinking about it.

For many people, autopay is a game-changing innovation that helps them build a stronger financial foundation by automating on-time payments of important bills. But it might not be right for everyone.

As with most financial tools, there are pros and cons to using autopay. It will be up to you to determine whether autopay is right for you, given your money management style and circumstances.

What is autopay? And how do you set it up? We’ll cover these questions along with discussing some pros and cons of autopay, so you can determine whether to consider using it.

What Is Autopay?

What many people call “autopay” is a scheduled, regular transfer of money, usually monthly . These payments are generally transferred from the payer’s bank account (or credit card) to a vendor.

Autopay is typically set up in one of two ways. The first is through the company receiving the payment. The second is through a bank’s online bill-pay portal.

When you link an account to a particular bill or vendor, autopay usually works over an electronic payment system called Automated Clearing House (ACH). (Sometimes automatic payments are referred to as “ACH payments” instead of autopay.) If you were to use your credit card, the recurring payment would simply show up as a charge on your card.

Setting Up Autopay

You can think of autopay as either pushing money from your account to the vendor, or the vendor pulling money from your account.

Many vendors require you to set up autopay through their website, so your first step may be to look into their requirements. If you are currently receiving a paper bill, they often include instructions on where you can go online to set up autopay—looking there is a good place to start.

For example, if you have a $1,800 monthly mortgage payment, you may be able to provide your mortgage company with your checking account information and they can pull the money for payment automatically. This is the “pull” version of automated payments as the vendor is pulling the money out.

You generally get to choose the day that the payment is made—you could consider doing this a few days before the bill is due. This should give the automated payment time to move through the ACH system, including when the due date lands on a weekend.

Also, you’ll likely want to be cognizant that you aren’t setting up any automatic payments until you’re sure that any necessary deposits are made. For example, if you need your paycheck to cash before making a rent payment, making sure to give your paycheck at least a few days to settle in your account may be the pragmatic choice.

Another potential option is to set up an ACH transfer through your bank. Doing this typically requires logging onto your bank account’s website and navigating to the bill pay section.

If you go through your bank, you may need to provide them with the information for the vendor, such as the account number and mailing address. You can usually find this information on your bill or monthly statements.

Using the same example as above, you would enter the information for your mortgage lender into your bank’s bill pay portal. Similarly, the money would be sent via ACH on the date you’ve picked to send the money to the vendor.

You may want to consider selecting a date a few days prior to the due date to avoid a late payment. This is the “push” method of automated payments as you are pushing the money out of your account to the vendor.

Pros and Cons of Autopay

Autopay can be a wonderful tool for many people looking to simplify their finances. But it won’t be for everyone. Here’s a look at some of the pros and cons of using autopay.

Pros of Autopay

Convenience: Gone are the days of sitting down to write a check for every last outstanding bill. In fact, these days you don’t even need to log into a computer every time a bill comes due. With autopay, you can pay all or most of your bills without lifting a finger.

This means no more logging onto multiple websites at various times of the month to make sure everything gets paid. This means no more having to log online to pay bills while you’re on vacation or busy with work or family. There is something beautiful about the convenience of the “set it and forget it” method to financial management, if you can make it work.

Improving Your Finances: We don’t need to tell you that it is a smart idea to pay your bills on time.

Not only can autopay help you to avoid frustrating late fees, but taking care of your bills right away may help you to avoid agonizing or allowing it to take up precious room on your to-do list.

Also, paying your bills on time may help your credit score. Currently, debt payment history makes up 35% of a FICO®️ Score.

That means that paying debt-related bills, such as a mortgage, car loan, or credit card bill, on time, could potentially improve your FICO®️ Score.

Learning Good Behavior: If you can take the philosophy behind automatically paying your bills and apply it to your savings strategy, this may help your overall financial success. Just as you can automate the payment of your bills, you can automate your savings to retirement and other savings accounts.

And it seems to work—automated savings in 401(k) plan has been shown to increase the savings rates of employees. If you don’t automatically set money aside, it can be far too easy to spend the money that lands in your checking account. Warren Buffett famously recommended that people “spend what is left after saving, do not save what is left after spending.”

Other ways to use automatic payments? Pay down debt aggressively or save outside of a 401(k). In either of these scenarios, you could simply set up an automatic transfer of funds as you would with autopay, but direct the funds toward your financial goal.

That way, the money is whisked from your checking account before you’ve even had the chance to consider spending it.

Potentially Saving Money: Vendors and service providers want to get paid on time. Therefore, some vendors or service providers offer a discount for customers that set up autopay, which could save you money.

One such example is SoFi, which offers an interest rate discount for members who set up autopay for their loans, including refinanced student loan loans. Other vendors may provide a discount on their product or service if you use autopay.

Cons of AutoPay

Possible Overdraft Fees: If there isn’t enough money in your account to cover a bill, an ill-timed automatic payment could cause your account to overdraft. According to a study conducted by NerdWallet, overdraft fees can range between $0 and nearly $40 depending on your bank.

You’d need to be especially careful if you leverage multiple checking or savings accounts with fluctuating balances, or tend to keep your account balance close to zero.

Late Fees: Consider the transaction time when setting up your autopay in order to avoid annoying late fees. Late payment fees will vary by vendor but could be costly.

While giving yourself, for example, a four-day buffer could be a good start, it’s important to check with each vendor to determine their recommended timeline. Finally, after you’ve set up autopay, monitoring payments during the first few months to be sure they happen on time can help ease the transition.

Could Reinforce Bad Habits: For some people and in some specific cases, it may not be a good idea to have your finances on autopilot. For example, those who are actively paying off credit card debt may want more control over how much they pay towards their debt each month.

There is almost always an option to autopay the “minimum payment” on a credit card, which may be tempting. There is no penalty when you pay the minimum payment, so it is certainly better than doing nothing.

But, it is much better to pay off the balance in full, if possible. When you do not pay the balance in full, the card will accrue interest, costing you money over time.

If you aren’t at a place where you can pay off the entire balance quite yet, you may want to try and set your autopay for an amount that’s more than the minimum payment so you can make progress on the balance. (And you may want to try to stop using your card in the meantime if this is the case.) If this won’t work for you, you may want to remain in manual control of payments.

Paying for Things You Don’t Need: Subscription services are sneaky. Amounts may seem small and you hardly notice them on a monthly basis, but they can wreak havoc on your annual budget. It is too easy to forget that you are paying for something, especially when you don’t use the service.

If you take advantage of the perks of autopay, don’t forget to reassess your subscriptions every few months to determine whether you actually need the thing you’re paying for.

Should You Use Autopay?

The digital age can be confusing and overwhelming, but this is one case where it may help to simplify our lives. Managing money can be a tedious task, and paying bills is just one part of it.

By streamlining the bills portion, you may find that using autopay gives you more freedom to focus your attention on other financial goals.

That said, autopay won’t be right for everyone and in every circumstance. For example, autopay might not be a great idea for those who tend to overdraft their accounts. It may not make sense for someone who is between jobs or out of work.

Autopay could potentially be difficult to manage for freelancers or other workers with variable income throughout the month. Ideally, a person would have some cash buffer for bills in any of these scenarios, but that is not the way it always works out in the real world.

If you are looking for another way to keep track of your bills and spending, SoFi Money® may be something to look into. SoFi Money is a cash management account that offers electronic bill pay, and you can track your spending in a mobile dashboard. On top of that, there are no account fees.

Ready to take control of your money? Download the SoFi app today to get started.


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