What Is an Automatic Bill Payment?
Let me explain what an automatic bill payment really is. It's a money transfer you schedule on a specific date to handle a recurring bill. You typically set this up with the company you're paying, but you can also arrange it through your checking account's online bill pay service.
Key Takeaways
An automatic bill payment happens when money moves automatically on a set date to cover a recurring bill, like your mortgage, credit card, or utility. You can organize auto pay via your online checking account, brokerage, or mutual fund for monthly bills. It offers real benefits: it's straightforward, helps you dodge late payments, and might even boost or sustain your credit score. On the flip side, it can be tough to cancel, and you must ensure your account has enough funds—otherwise, you could face returned payment or late fees.
How an Automatic Bill Payment Works
Auto pay works for various transactions, including installment loans, auto loans, credit cards, mortgages, electric bills, cable bills, and more. To get it going, you need to authorize the vendor—say, your utility company—to charge your checking account. You do this on their website or through your bank's bill pay feature.
Pros and Cons of Automatic Bill Payment
- Pros: Payments are simple to automate from your checking account. Organizing them helps you avoid late payments. Paying automatically and on time aids in improving or maintaining a good credit score. Once set up, you don't have to repeat the task monthly.
- Cons: Without a cushion in your checking account, a payment could bounce. You might face returned payment or late fees. You could overlook mistakes or fraud since it's automatic. Cancelling can be difficult.
What's an Example of an Automatic Bill Payment?
Imagine you have a $600 car payment due on the 10th each month for 60 months. Instead of logging in every time to schedule it with the auto loan company, you set up automatic payments once. You agree to transfer $600 from your checking account to them on the fifth of each month. This ensures your payment is never late, saves you the monthly hassle, and helps maintain or improve your credit score.
Why Is Auto Pay a Good Idea?
Auto pay saves you from remembering to make payments every month. It helps you avoid late fees and, in some cases, builds a solid credit score.
What Are Some Drawbacks of Auto Pay?
Cancelling auto pay can be a challenge. You might forget about payments and keep paying for unwanted services. If you overlook scheduled payments and lack funds in your account, the payment bounces. Then your bill stays unpaid, and you could get hit with a returned payment fee from the vendor, a late fee, and a bounced transaction fee from your bank.
Note
You can set up auto pay for nearly any transaction, from credit cards to mortgages.
The Bottom Line
Automatic bill payment is a routine transfer from your banking, brokerage, or mutual fund account to vendors. It guarantees on-time bill payments, but watch out—if your account lacks funds, the payment bounces, leading to fees from the vendor and your bank. Think carefully if auto pay fits your situation.
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