An automatic bill payment is a money transfer scheduled on a predetermined date to pay a recurring bill. Automatic bill payments are routine payments made from a banking, brokerage, or mutual fund account to vendors.
Automatic payments are usually set up with the company receiving the payment, though it’s also possible to schedule automatic payments through a checking account’s online bill pay service. Automatic bill payments occur over an electronic payment system, such as the Automated Clearing House (ACH).
Key Takeaways
- An automatic bill payment occurs when money is automatically transferred on a scheduled date to pay a recurring bill, such as a mortgage, credit card, or utility bill.
- Individuals can set up an automatic bill payment through their online checking account, brokerage, or mutual fund to pay their monthly bills.
- Advantages of automatic bill payments include the ease of automated payment, the ability to avoid late payments, and the potential to maintain or improve your credit score.
- Disadvantages of automatic bill payments include the difficulty in canceling them, the need to keep adequate funds in your checking account, and the potential of incurring a returned payment or late fee.
How an Automatic Bill Payment Works
Automatic bill payments can be scheduled for all types of payment transactions. This can include installment loans, auto loans, mortgage loans, credit card bills, electric bills, cable bills, and more. These payments can be automated quite easily from a checking account.
Setting up automatic bill payment involves making arrangements with the bank holding the checking account to make the exact payment each month. The set of instructions is typically created online by the account holder. More frequently, this power is given to the vendor (the utility company, for example) to charge the checking account for whatever amount is owed that particular month. In both cases, the individual paying the bill must initiate the automatic bill payment and provide the necessary information required to make automated recurring payments.
Pros
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Payments are easy to automate from a checking account.
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Organizing automatic bill payments helps you avoid late payments.
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Paying automatically (and always on time) helps you improve or maintain a good credit score.
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Once payments are set up, you don’t have to keep doing the task each month.
Cons
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If you don’t keep a cushion in your checking account, an automatic payment could bounce.
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You may incur a returned payment fee or late fee.
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You could miss catching mistakes or fraud because the payment is automatic.
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Automatic payments can be difficult to cancel.
Inspirational Example: Bob’s Seamless 5-Year Plan
Automatic payments save consumers the hassle of having to remember to make a payment month after month. They can also help consumers avoid late payments.
For example, suppose Bob has a $300 car payment due on the 10th of every month for the next 60 months. Instead of logging into his online account with the auto loan company to schedule the same payment each month, he could set up automatic payments one time and agree to have $300 automatically transferred from his checking account to the auto loan company on the fifth day of each month. This way, Bob knows his payment will never be late, and he’ll avoid the trouble of doing the same task each month. He’ll also improve—or maintain—a good credit score.
Potential Pitfalls of Automatic Bill Payments to Watch Out For
Automatic payments have a couple of potential downsides. If you forget about your scheduled automatic payments and do not maintain a cushion in your checking account, an automatic payment could bounce. Not only will your bill remain unpaid but you might also incur a returned payment fee from the company you were trying to pay, as well as a late fee for missing the due date. And automatic payments aren’t infallible. You still need to check regularly to make sure your scheduled payments have gone through as expected.
Another problem can occur when you authorize automatic payments that vary in amount. For example, suppose you set up automatic payments of your credit card bill from your checking account. If you don’t look at your credit card bill when it arrives, you might have an unpleasant surprise when it’s automatically paid in a much higher amount than you expected because of a mistake or fraud—or because you simply didn’t realize how much you had spent.
Automatic payments can also be difficult to cancel. Additionally, consumers might forget about certain automatic payments and continue to pay for services that they no longer want.
Related Terms: Automated Clearing House (ACH), recurring billing, installment loans.
