Juggling various bills, due dates and login credentials can be stressful. Automatic bill payments can help you simplify your finances, avoid late fees and even help you build your credit. But before you enroll in automatic bill payments, it’s important to understand how the process works.
What is automatic bill payment?
An automatic bill payment is when you set up a recurring transfer from one of your accounts, such as a checking account, to pay a bill, such as a loan or subscription. When you enroll in automatic payments, you allow a company to withdraw money from your bank or credit card to pay your bill.
You can use autopay for all kinds of recurring expenses, such as:
- Mortgage or rent.
- Utility bills.
- Credit cards.
- Loans (student loans, personal loans, auto loans).
- Health or auto insurance payments.
- Streaming subscriptions.
How automatic bill payment works
You can set up automatic bill payments through your bank or directly with the vendor.
“Your bank can send a payment automatically (typically called bill pay), or the vendor can automatically charge your set payment method,” said Charles Ho, certified financial planner and chief executive of Legacy Builders Financial.
“In the first method, you set up your bill to be paid by your bank automatically,” said Ho. “In the latter, the vendor automatically charges your bank or credit card on a set frequency, but the amount can differ.”
Pros of automatic bill payment
There are some benefits and drawbacks to consider before enrolling in automatic bill payments. Benefits of automatic bill payment include:
- No late payment fees. Enrolling in automatic payments puts your bills on autopilot. Your payment is automatically withdrawn from your bank account or credit card on the due date—so there’s no need to worry about missed payments or late fees.
- Convenience. Once you enroll in automatic payments, you no longer have to remember due dates or make payments manually. “The days of setting aside an evening to go through our bills and write checks are behind us as bills can be paid automatically without having to think about them anymore,” said Ho.
- It can help your credit score. Automatic payments make it easier to pay your bills on time. This is great news for your credit, as payment history makes up 35% of your credit score. Each month you pay a credit card or loan payment on time strengthens your credit history.
Cons of automatic bill payment
Drawbacks of automatic bill payment include:
- Overdraft risk. If you’re not keeping an eye on your balance, automatic bill pay could overdraft your checking account; all it takes is one higher-than-expected bill to throw off your budget and put you in the red. For this reason, autopay is best for bills that don’t fluctuate, so you always know how much is leaving your account and when.
- Billing errors. Though you can “set it and forget it” with automatic bill payments, you should still monitor your bank and credit card accounts for duplicate charges and other errors. For example, some card issuers may continue taking your automatic payment until you cancel—even if your credit card balance is $0.
When to get automatic bill payment
Automatic bill payment may be best for those with a good handle on their finances and typically end the month with some money leftover in their bank account. If your account balance consistently gets too low or goes negative, an automatic payment could overdraft your account, potentially resulting in late fees and penalty APRs.
Automatic bill payment example
You can use autopay for many different types of bills, such as utilities, loan payments and streaming services. Let’s say you want to enroll in automatic payments for your electric bill. Here are the steps you would take:
- Visit your electric company’s website and login into your account.
- Find the section that says “manage automatic payments” or “set up autopay.”
- Enter your payment information (the bank account or credit card you want to use for the automatic payments).
Some companies may give you the option to choose when to have the payment withdrawn, which is helpful for staggering multiple due dates. If you have trouble signing up for automatic payments online, try calling customer service to enroll by phone.
Should you get automatic bill payment?
Should you sign your bills up for automatic payments? It depends on your financial situation.
“If someone has adequate emergency savings, is regularly cash flow positive, and has a healthy checking account balance, automatic bill payment can be a time saver,” said Ho.
On the other hand, someone with a less stable financial situation may want to prioritize building a stronger foundation first.
If you’re living paycheck-to-paycheck, for instance, a higher than expected cost could cause you trouble.
Benefits and perks of automatic bill payment
Between family and work responsibilities, life can get pretty hectic. Enrolling in automatic bill payments is a great way to save time, free up mental bandwidth and enjoy greater peace of mind with your finances. You may even be able to save a few bucks, as some companies offer an autopay discount or interest rate deduction.
You can think of automatic bill payments as another tool for your financial toolbox.
“Automatic bill payment is best viewed as a tool that can make people’s lives easier,” said Steven Meyers, financial psychologist and professor of psychology at Roosevelt University. “However, just like any tool, people need to know how to use it and determine if it meets their objectives given their circumstances”.
How to manage your automatic bill payments
It’s crucial to keep track of your automatic payments in a notebook, spreadsheet or calendar. That way you know when bills are due to come out of your account and can make sure you have enough to cover the payment.
“The greatest risk of automatic bill payment is having a payment issued when there aren’t sufficient funds in your account, as this could result in account charges or put your credit score at risk due to nonpayment,” said Meyers.
If you notice your checking account balance getting low before the end of the month, it could mean you’re living beyond your means. Take a closer look at your spending to identify expenses you may be able to cut or see about moving payment due dates around to give yourself some breathing room.
Frequently asked questions (FAQs)
Autopay services are safe. However, since enrolling in automatic payments involves providing your bank or credit card account information, make sure the company is one you know and trust.
It depends on the vendor, bank and where the payment due date falls, as banks don’t typically process payments on weekends. It’s best to schedule automatic bill payments a few days before the due date, as they can take up to five business days to process.
You can set up automatic bill payments through your bank or the company you want to pay (such as your utility or credit card company). Both options can be done online or by calling customer service. You should be able to choose the frequency and whether to pay the minimum payment or the total account balance.
