Whether you are rushing out the door and forget to grab your keys, or misplace your cell phone after a night out, it’s often easy to forget important things. But forgetting to pay bills is something that can have much greater financial ramifications.
According to the National Foundation for Credit Counseling, one in four Americans has trouble paying all of their bills on time. Using automatic bill payment is one way that could help bills get paid by the due date, helping avoid those late fees.
Many companies offer the ability to auto pay bills, by taking out the money on the due date from a connected bank account—as long as there is enough money available to cover the bill, of course.
After the initial set up, automatic bill payment can help pay recurring bills with minimum effort. Simply put, automatic bill payments, once they are in place, allow someone to transfer money from their own account to a creditor, like for a credit card payment, or service provider, like for a utility bill, without needing to actually initiate a payment every time the bill is due.
While automatic bill payments might seem like a catch-all solution to help avoid late fees and potentially boost credit scores with on-time payments, there are some disadvantages to be aware of as well, such as overdraft penalties if there is not enough money in the bank to cover the bill. Explore the pros and cons of automatic bill payment to decide which bills, if any, might be a good candidate for automatic bill payment.
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Advantages of Automatic Bill Payment
Automatic bill payment is an easy way to cross off one more “to do” from the list. First, it’s simply more convenient for a lot of people. Instead of remembering specific bill due dates and having to log in to different websites or sending paper checks through the mail, automating personal finances simplifies the experience.
Once payments are set up, some people can adopt a “set it and forget it” mentality, meaning they don’t have to worry about exact due dates. While it’s still important to be aware of when money will be leaving the bank, sometimes the reduced stress of not worrying about due dates every month is worth it.
Automatic bill payment is also secure. According to Forbes, online accounts and payments might be considered safer than traditional paper checks and statements, because of the focus on digital transactions. Avoiding those physical bills and mailing in checks can help reduce exposure to fraud. Through the encryption banks use to secure customer information, accounts may also be better protected. Plus, a digital transaction is much easier to track in real-time and make sure the correct amount for each bill went to the right place, rather than waiting weeks to see if the company cashes a check.
Putting bills on autopay can help avoid the stress over worrying if a bill got paid, of course, but it could even give finances an eco-friendly boost and reduce the number of paper bills mailed out.
One big advantage to all of this: Paying bills automatically when they are due means avoiding late fees that could be incurred by failing to pay on time or missing a payment. Those fees can add up quickly. While automating bills could help avoid late fees in the short term, it could also help prevent a credit score from dropping. In fact, payment history affects 35% of someone’s FICO credit score. FICO reports that negative marks on credit history can fade over time with consistent on-time payments.
Plus, some creditors, such as federal student loan servicers, offer a discount for setting up automatic payments. In some cases, this is an interest rate reduction, which could help reduce the total amount of debt paid overtime.
When it comes to bills, it can sometimes be overwhelming to know where to begin to get organized, especially with a scary pile of unopened letters. But while it might take some effort and time to set up, automating personal finances could be a smart money move that will benefit people looking to avoid late fees and simplify all those deadlines.
Disadvantages of Automatic Bill Payment
One major downside to putting bills on autopay is the fact that, well, the payments will be automatic. If there is not enough money in the connected bank account to cover the cost of the bill, there is a risk of overdraft fees or even late fees.
Some payment amounts change month to month, such as utility bills. Without checking ahead of time how much the bill will be, it’s possible for the utility company to simply withdraw what is owed, causing the account to be overdrawn. Overdraft fees depend on the bank, but the Center for Responsible Lending found that all 10 of the biggest banks in America charge overdraft fees greater than $35. In fact, the center also reports that large banks charged consumers $11.68 billion. in overdraft fees in just one year. Forgetting about automatic withdrawals from financial accounts could lead to overspending, pushing account balances lower than the amount needed to cover those pre-set bill payments.
Another disadvantage of automatic bill pay is that it reduces the amount of control over what money is going out at certain times. One safeguard that could be put in place to help prevent over-drafting is to spread out bill payment dates throughout the month, rather than having them all grouped together. Bills might be scheduled for the beginning or the end of the month, but it’s simple to change the date of automatic payments, with enough notice.
The Consumer Financial Protection Bureau offers a worksheet to help visualize which weeks every month are the most hard-hit with a lot of bill payments. By evaluating bill due dates, compared to income dates, this type of exercise could help provide some insight into which bill deadlines if any, should get moved.
The CFPB recommends directly contacting the bill provider, either on the phone or through the company’s website, to look into existing information regarding payment due dates and how to change them. For companies that do allow bill due dates to be moved, it might be helpful to identify a preferred date for payment that better matches income timing.
Getting paid semimonthly, for instance, might mean it would be easiest for bills to fall after the first or 15th of the month. When moving a bill due date, always double-check when the change will go into effect to avoid any late payments.
Some financial planners even recommend setting up a separate bank account just for bill payment. This way, there is still an additional check and balance step of moving the money over into the “Bills” account, helping to reduce the possibility of an overdraft or missed payment due to lack of funds. While it might seem like extra work, it could be just one step instead of all the steps it takes to pay multiple bills separately.
Whatever the case, whether paying bills manually or using automatic withdrawals, it’s important to still be intentional about making and keeping a budget.
How to Set Up Automatic Bill Payment
Like a proud parent waving goodbye at the door, letting bills go on their own volition might not feel exactly like sending a kid off to college, but there’s a great sense of satisfaction either way. There are two methods for bills to head off into the world on their own, no supervision is needed.
The first option is online bill pay, set up directly with a financial institution. The bank will need the information about the payee account—for instance, a cell phone carrier needing to get paid—and then the bank can automatically pay a recurring bill from the connected bank account.
Simply navigate to the financial institution’s website and find the “bill pay” area, and follow the prompts to set up a recurring or future payment. Have a recent bill on hand, since the bank will need information like the payee account numbers, addresses, due dates, and other important information.
This method might be best suited for bills that are consistent month to month, in order to schedule recurring payments. And for those worried about privacy and information security, this method means that personal bank information isn’t given out to those third-party companies. This method can also help keep multiple accounts and bills in one place since the bills will all show up together under the bank’s auto-pay feature.
The other, more common method people think of when it comes to automatic bill pay is an automated debit transaction. This allows the payee to deduct money directly from a checking or savings account every month, by providing them with banking information. This is how overdrafts and fees can happen, since even if there are not sufficient funds in the account, the charge may go through if the bank chooses to still make the payment.
If the balance of the bill is going to change every month, this type of payment might be a better option, so the company can take out the full amount owed to them. Some companies will require this type of payment to come from a checking account, while others might allow a credit card payment. Check with the company to understand their individual bill payment system.
With consistent, monthly bills like internet service, cell phones, or even rent, it’s easy to know what to expect every billing cycle and set up payments to match. Infrequent bills, however, such as subscriptions, credit cards, or insurance premiums, might not be ideal for automatic bill payments—if they are infrequent, it’s easier to forget about them and risk overdrawing when they do hit the bank.
It might be a good idea to sign up for email alerts or other reminders for when the automatic bill payment will be posted, in order to help stay on budget. An account such as SoFi Money®️ offers a robust bill-pay feature that can be set up directly in the account, using either the direct online bill payment method or the automatic debit transaction method.
A major con of automatic bill payments is the risk of overdraft fees, but with SoFi Money, there are no overdraft fees to worry about.