Risks and rewards of automatic bill payment

Automatic bill payment can help you pay your bills on time with minimal effort, once you take the time to set up the payments with your financial institutions and service providers. That might sound appealing, but be careful — there are some pitfalls to watch out for.

Read on to learn more about the rewards — and risks — of using automatic bill payment.

What is automatic bill payment?

Automatic bill payments, once you set them up, allow you to transfer money from an account of yours — say a bank, credit union or credit card — to a creditor, service provider or other vendor at a preset date, without having to initiate the payment yourself every time a bill is due.

You can set up an automatic bill payment as a “push,” meaning you originate a payment from your bank or other financial institution to a service provider. But if you want a vendor to draw — or “pull” — money from your financial account for an agreed amount when a bill comes due, you’ll have to set up something called a pre-authorized payment.

Automatic payments can usually be set for whatever cadence a bill is due — weekly, monthly, quarterly or even annually — though it may be risky to set automatic bill payments too far in the future. More on that later.

Pros and cons of automatic bill pay

Pros

• You can save money. Some companies may offer payment reductions for customers who set up automatic payments.
• You won’t have to remember due dates for specific bills. Once you set up your payments, your bills will be paid at the predetermined time.
• You can avoid late payment penalties. By taking yourself out of the equation after automating payment, you also remove the risk of forgotten (and missed) payments. That’s good protection against service interruptions, fees or possible damage to your credit scores.

Cons

• You could overspend. If you forget about the automatic drafts from your financial accounts, your spending might push your account balance lower than the amount you need to cover your preset bill payments.
• You could get hit with fees. And if you don’t have enough money in your account to cover automatic payments, you could get hit with fees from both your financial institution and the vendor.
• You have to monitor your account balances. See above for what might happen if you don’t!

When is automatic bill payment a good idea?

As you can see, automatic bill payment can be helpful, but only if you’re organized and committed to monitoring your finances.

As long as your monthly expenses are consistently less than your income — for most of us that means a job that pays us more than we spend — automatic bill pay could work for you. But even if you’re confident about it, it’s best to start with one or two predictable bills that aren’t too large. Once you get used to that, you can try adding more bills until you find a system and level of automation that works for you.

Remember, automatic bill pay is not a license to totally check out on your finances. It’s just supposed to help you guard against missed payments and cut down on your worry and time spent on your finances.

It’s also important to remember that even with automatic payment set up and running smoothly, you should still check periodically for errors in your billing statements. Look for changes in prices and amounts billed, or unexpected one-time charges that can throw you off track.

What bills work well with automatic bill payment?

It’s best to use automatic payment for bills that come due relatively frequently, say weekly or monthly, and for a predictable amount. With bills like your mortgage, cellphone or internet service, you know what to expect every billing cycle, and you can set up your payments accordingly.

Infrequent bills, like an annual subscription or semiannual vehicle insurance premium, may not be the best candidates for automatic bill payment, because you’re likely to forget about them. If one of those bills hits your account when your balance is low, you may end up overdrawing your bank account and getting hit with a fee.

Automatic payments for accounts with different amounts due each billing cycle are usually best handled with a “pull” — that is, by authorizing a vendor to debit your account for the amount due. But beware — if you don’t know in advance how much you’ll be billed, you could end up worrying about overdrawing your account or having to check ahead of time how much you owe, which would undermine the main advantages of automatic bill payment.

Credit card bills present challenges when it comes to automatic bill pay, because you’ll want to cover at least the minimum amount due, but you may or may not have enough money to pay more every month. One solution is to authorize a credit card to debit your bank account for the minimum amount due each billing cycle, and then make a manual payment for anything over the minimum you want to pay. This way, your automatic payment protects you from being charged any late fees or penalties, but you can still pay more than your minimum as your budget allows.

Tips for setting up automatic bill payment

Most financial institutions offer online bill pay these days, and many of them will allow you to set up recurring automatic payments. It’s usually a matter of navigating your bank’s or credit union’s website to the bill pay area and then following prompts.

If you want to set up automatic bill pay, have recent bills from service providers and creditors handy. When prompted, enter the appropriate account numbers, addresses, dates and amounts you want to pay. Once you’ve entered the information, and followed the appropriate prompts, your financial institution will send the money to the service provider each billing cycle.

Keep in mind that when you set up automatic bill payment through a vendor — the “pull” method — you’re authorizing a company to deduct money from your financial account. So make sure you verify the identity of the company and understand how its automatic bill payment system works.

Bottom line

Automatic bill payments — once you take the time to set them up — can help you handle your bills with minimum effort and cut down the time you have to spend each month making sure you pay bills when due.

If you choose to use automatic bill pay, start with just a few bills to get used to the system, monitor your available cash to be sure it will cover your preset bill payments, and check your bills regularly for changes or mistakes.