How Does Bill Pay Work?

Automatic bill pay allows users who’ve signed up for this service to pre-schedule regular and repeat payments from their money accounts to pay down recurring or monthly bills. For some, it can reduce the likelihood of forgetting to pay a bill or incurring late-payment fees—as the payment is automatically deducted once the bill is due.

Nobody enjoys parting with hard-earned cash. For many people, spending money is just one reason paying bills can feel like a burden. Different bills are due on different dates. It can be hard to remember where, when and how much to pay.

Online bill pay is one way to ease some of the frustration associated with paying regular bills. Before answering the question “how does bill pay work?” it’s helpful to understand some of the reasons bills can give people so much grief—including factors such as, scheduling logistics and personal finances.

Keeping Track of Outstanding Bills and Extra Fees

One research report (spanning 2,000 individuals) indicates that 28% of Americans report difficulty in paying their bills on time. In this group, 52% of those earning less than $25,000 or less noted difficulty with paying bills, while only 11% of those earning $125,000 or higher reported the same bill-paying challenges.

Being able to afford to cover all their expenses is one issue standing in the way of on-time bill payments. But, for other folks, keeping track of competing due dates and variable amounts owed can be another pain point in how to pay bills.

The high volume of bill payments most Americans have to make each month certainly doesn’t make things easier. Americans spend nearly 3 trillion dollars , annually, on regularly due bills—including common expenses like mortgage or rent, internet, and utilities.

And, many of these bills, if not paid on time, can incur late or overdraft fees that add up. One recent report notes that the average American home spends an extra $577 per year in added bill fees or costs.

Below is an overview of common obstacles to that can get in the way of paying bills on time, including an explanation of what is bill pay:

Understanding the Cost of Overdue Bills

Naturally, it’s not a great idea to ignore bill payments, or to pay bills only when there’s some extra cash lying around. Most bills arrive in the mailbox (inbox) with a clearly marked due date. Failure to pay on time can impact a payee’s access to service (e.g., utilities) or negatively affect their credit history. Either scenario might strain an individual’s everyday life or finance in the future. Here are some consequences of not paying bills on time:

Imposing Late Fees

One of the ways companies or service providers enforce on-time payments is by penalizing people for, well, paying late. Whether it’s a credit card, utility bill or simply missing a payment date by a single day, submitting a late payment can result in late fees, higher interest rates, or other charges. Put another way, not paying right now can cost individuals more in the long run. It’s worth noting that these fees or penalties can be higher if a person has a previous history of late or unpaid bills.

Accruing Interest Charges

On top of late penalties, some providers may also charge interest on the balance owed, essentially creating a double-wallop of fees if you’re late paying a bill. In some cases, the interest may be charged starting the day an account becomes overdue. In others, it may accrue going back to the purchase date or transaction day. Depending on the interest rate charged and how frequently that interest compounds, this fee could quickly balloon to more than the initial fee assessed.

Experiencing Service Disruptions

In some cases, a provider may have the right to shut off your service if you pay a bill late. Not only are such disruptions a major interruption to daily life (ahem, no water, ahem) individuals may also have to pay a reinstatement fee once account has been paid—just to reactivate the service, such as electricity, natural gas, or the internet.

Declining Credit Rating

Think no one other than the service provider will notice a missed bill payment? Not so, in many cases. Payment history on outstanding debts makes up 35% of a FICO credit score. So, things like, overdue credit card bills, unpaid mortgage or car payments, and other late payments can erode an individual’s credit score.

It’s worth recalling that lenders and landlords can rely in part on credit scores when evaluating the risk of doing business with someone. So, dings to a credit score—things like late payments—can impact the likelihood of being approved for a loan or a lease. (Generally speaking, lenders consider a score below 580 a sign that the borrower is at a higher risk of not paying back the money loaned).

Even if approved, having a lower credit score could increase the rate of interest charged on a loan or credit card, potentially costing the borrower thousands of dollars over time.

Weighing the Benefits of Bill Pay

Not having enough money is just one reason people pay bills late. In many cases, the complexity of managing competing bills is a factor. It can be difficult to stay on top of each individual due date, especially for one-off bill payments or those bills that get paid less frequently, such as quarterly and annual bills. If you pay different bills from separate accounts, paying bills can become even more tangled.

Forgetting to pay a bill from time to time is surprisingly common. One report from June 2020 noted that close to 40% of American financial decision makers skipped or only partially paid a bill in the last month.

And as innocent as this oversight may sound, an unintentional late payment does not always remove the consequences. Adopting regular strategies for paying bills can help solve remembering when to pay each bill (and with which account).

One payment strategy is to turn to modern technology, such as online bill pay tools. Bill pay automates the act of paying bills. Instead of remembering to pay each individual bill, while keeping track of competing due dates and amounts, bill pay allows users to set to schedule a payment in advance and then, essentially, to forget about it.

Automatic bill payments are a key way to prevent late payments and to simplify this important aspect of managing one’s finances—but, not all who can actually use automated bill pay services available to them.

What’s standing in the way? For many, it comes down to simply not knowing the answer to the question, “how does bill pay work?” Below is a step by step overview of how bill pay works—naturally, there may be internal differences between specific banks, credit unions, and financial institutions.

How to Use Bill Pay

While bill pay can help make managing finances simpler, it does require some initial manual set-up. But, once you’ve learned how bill pay works, this automatic feature can make keeping track of and paying bills less obersome. Here are some ways to get started:

1. Finding a Financial Partner that Offers Bill Pay

While many financial institutions offer digital payment tools, like bill pay, it’s worth investigating the features that are included at each, before opening up an account. Online billing is free with some accounts, while some providers may charge for each transaction—either per bill or on a repeating monthly basis.

2. Determining which Bills to Autopay

Utility bills, loan payments, credit card bills—you can pay just about any bill using bill pay. One benefit of centralizing bill payments is that, whether it’s a one-off charge payment or recurring bill, the user can rest assured that the bill will get paid on time—assuming bill pay has been set up correctly and there are sufficient funds in the linked account.

To streamline bill payments even further, it may be helpful to think about which ongoing bills you want to automate on a revolving basis through bill pay. Every month, bill payment could go out automatically, on a schedule determined by you, to the businesses or service providers where the money is due.

Predictable expenses that don’t fluctuate from month to month, such as loan and mortgage payments or the internet bill, are solid candidates for recurring automated payments. After all, it can be easier to budget for an expense that won’t go up and down from month to month. For bills that always cost the same, you may want to schedule payment for a time each month when you know they’ll be sufficient funds in your account to cover what’s come due. Some service providers may even allow you to change the due date on certain bills.

3. Gathering Together All Bills

Once a person has figured out which bills to pay automatically, they still might want to gather together all their regular bills in one place. While individual bills are generally due at the same time each month, bills from different businesses or providers will have different due dates.

With all the bills in one place, you can then enter the various billing accounts into your money management provider’s bill pay system. It could be useful to research each bill ahead of time, determining whether they’re delivered by snail mail, paperless emails, or both.

4. Logging on to Personal Finances

As with other personal finances, bill pay is generally managed through a financial institution’s website or mobile app. A person interested in accessing bill pay could simply sign on to their secure account and search for the “Pay a Bill” or “Online Bill Pay” function.

5. Inputting Billing Information

Once logged on, you might follow the prompts to add individual billing accounts, indicating for each the funds you wish to pay with. You’ll likely be asked to input the name of the business or service whose payments you’re seeking to automate. You may also be asked for more specific details, such as your individual account number.

If you can’t find the business or service provider listed, you want to try spelling out the full name, removing abbreviations. If you still can’t find the payee, it’s possible that you can still utilize bill pay, but you may need to manually add in the payment details.

Having printed or saved digital copies of previous bills handy can be helpful here. (One other potential option is to set up automated payments, linked to your money accounts, directly through the provider—for instance, the water department of the city where you live).

When paying electronically, you’ll need to add your account number so that your payment is properly credited to you. You can also add the amount and frequency of payments, selecting a specific payment date (for one-time payments) or a regular schedule (for repeat bills that get paid on the same date every month).

Some financial institutions place a cap on the amount of money that can be transferred electronically through bill pay. If an automatic payment exceeds that designated transaction limit, users may then need to pay via a physical method, such as a personal or cashier’s check.

6. Taking Note of the Billing Schedule

While bill pay may ease the burden of remembering when bills are due, it’s still important to stay on top of the days each payment will go out. Knowing this ahead of time can help make sure there’s enough money in the linked accounts to cover bills paid on different days. Otherwise, you may run the risk of a payment being declined (which can incur extra fees or charges) or overdrawing funds (which can incur even more fees and charges).

Doing a little homework ahead of time can save a financial headache later on. Check with your financial institution to find out when automated payments will begin (and how long it takes for funds to be transferred from your accounts). In some cases, funds may be drawn several days before a bill is “due” to be paid. Naturally, paying with a physical check can take longer—as the recipient will need to deposit and cash the payment.

Knowing when your payments are processed also means that if any changes arise—such as you not needing to pay a bill one month or wanting to change the payment amount—you’ll know when the date by which you need to make modifications.

7. Adding New Bills as Needed

From time to time, you may sign up for a new service that comes with a recurring bill. Or, perhaps you have to make a one-off payment. It’s good to add these bills to the automated queue, when they’re top of mind. Some people like to periodically review ongoing automated payments to ensure they stay up to date. When moving, it may even be necessary to switch or set up a new account—which could necessitate altering or updating bill pay.

The Takeaway

Paying bills each month may never spark fun-filled feelings. But, it’s still possible to pare some pain from the monthly payment doldrums. Signing up for automated bill-pay can ensure that outstanding bills get paid on time or when you have more money in your accounts, reducing the likelihood of late-payment or overdraft fees.

With a SoFi Checking and Savings online bank account, users can pay bills automatically with no account fees. Members also have access to complimentary budgeting tools and financial planning advice.

Simplify your money management with SoFi.

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