Dangers of Automatic Bill Payments On Your Finances

Photo Credit: Goumbik

We are all busy these days. There are new emails waiting to be checked, Netflix shows to binge watch, Instagram updates from friends of what they had for lunch, or The Donald’s latest tweets to read. With so many things vying for our attention, automatic bill payments can be really appealing. You spend five minutes setting it up, and you never have to see or manually pay another bill again!

With automatic bill pay, you can set up auto payment plans for all your bills. Your utilities, mortgage, phone, internet, cable, auto, or any other regular payments can be automatically deducted from your bank account at your scheduled date, freeing you from missed payments and late fees.

Signing up for this feature seems like a smart idea. Just about every business now offers this convenient payment option. It saves them time and money with customer service reps no longer having to answer calls every month from people who just plain forgot to pay their bills, or from checks getting lost or delayed in the mail.

For you the customer, there are many benefits for choosing automated bill payments:

  • Convenience: You no longer have to remember whether you have paid your bills or not. Your bills will be paid even when you are traveling or somewhere without internet access for an extended period of time. Gone to hike the Appalachian Trail or off sailing across the Atlantic? No problem. Auto bill pay has got you covered.
  • Saves Money: You longer have to buy postage or paper checks. I used to mail out almost a half dozen checks every month. Now, I send out maybe that many in an entire year. You also avoid late fees and penalties from forgotten bills.
  • Improves Your Credit Score: Your payment history makes up the largest percentage of how your credit score is calculated. The best way to improve and keep your credit score high is to pay all your bills on time. Automated bill pay helps you stay  on top of your bills and avoid delinquencies.
  • Environmentally Friendly: By doing away with paper bills, you are helping the environment. You save paper and trees by forgoing the stamps, envelopes, paper, and ink used to print the bills, not to mention the gas that the mailman would use to deliver your bills to your mailbox.
  • Prevents Identity Theft: You wouldn’t leave your credit or debit card laying around. Yet when you mail a check, you are leaving your bank account information out in your mailbox at your curb. A check has your name, address, account number, and routing number. This is all the information a thief needs to set up an electronic transaction using your account.

The Dangers of Automatically Paying Bills From Your Bank Accounts

With all those advantages listed above, signing up for automatic billing seems like a great idea. However, if there is a mistake you could be left with an empty bank account and you fighting with the company’s billing department or the bank to get your money back.

With automated debit transactions, you provide a company your bank account, routing number, and permission to regularly draft from your account what you owe. At least that is the thinking.

There have been stories of people having tens of thousands of dollars accidentally withdrawn from their accounts due to an error. In one case, a woman’s electric bill showed that she owed $284 billion because of a misplaced decimal point. We like to think computers are infallible, but it is humans who write the programs that the computers run on. As humans, we make mistakes. Lots of mistakes.

Another major downside with using your checking account for automatic payments of your bills is overdraft fees. You still need to check your balance regularly to make sure you have enough funds to cover any upcoming charges. A higher than expected bill or accidental over-charge could cause an avalanche of overdraft fees if it causes other payments to overdraw your account. When the median overdraft fee is $34, those charges add up fast.

This brings up the next issue of auto bill payments. I’ve found that it can be easy to overlook charges when they are deducted automatically. If you are writing out a check or typing in an amount each month, you will notice if a bill is higher than normal. But with paperless billing and automatic payments, it is easy to be lulled into complacency when things go according to plan for a period of time. When a bank error or billing mistake does happen, it’s not hard for it to go unnoticed if you aren’t regularly keeping up with your finances.

Giving a company access to auto-draft your bank account can also lead to continued charges even when you’ve canceled your service. We’ve all heard stories about how some companies make us jump through hoops to cancel a service. Gym memberships are notorious for this, forcing people to fax in letters or provide proof they’ve moved out of the area to cancel. Some businesses will even only accept bank accounts and not credit cards because people will chargeback or cancel their credit cards to stop being charged because of how difficult it is to cancel.

Don’t even consider automatically paying your bills with your savings account. A federal rule by the Federal Reserve Board known as Regulation D limits the number of withdrawals per month from a savings account to six. Go over that limit and your bank or credit union could charge you a fee, close your account, or convert it into a checking account.

Smarter Ways To Automate Your Bill Paying

1. Pay with your credit card

Many companies will allow you to pay your bill with a credit card. Using a credit card can be a safer way to pay your bills.

Credit cards have better consumer protections than a debit card or electronic transfers from your bank account. In case of unauthorized charges or over-billing, you can submit a dispute instantly online and you will not be out of any money while the credit card company investigates.

Read more: Why credit cards are a better choice than debit cards

If a company overcharges your checking account, you are out of money while their billing department determines what went wrong. Then it will take a few days for the refund to show back up in your account. In the meanwhile, you still have other bills to pay.

Another benefit of putting all your bills onto your credit card is you have all your charges in one place with a single bill to pay at the end of the month. I have my monthly phone, internet, health insurance, and web hosting bills all automatically charged to my credit card. At the end of the month I look over all the charges on the statement and pay just one bill. If I have more charges than funds in my checking account due to unexpected expenses, I have time to transfer over money from my saving account and avoid any insufficient funds charges.

An additional bonus of using your credit card is you get to earn additional rewards points or cashback simply for paying your everyday bills.

As long as you pay off your credit card bill every month before it is due, you will not be charged interest so there is no drawback in choosing to pay with a credit card over your bank account or debit card.

However, if you are charged convenience fees for using your credit card, you should find another method to pay your bill.

2. Set up online bill pay through your bank

Online bill pay through your bank is different from allowing businesses to automatically debit funds from your bank account. Instead of providing merchants your account and routing number for them to “pull” money from your account, your bank initiates the transaction so you are “pushing” money to them. This is a safer way to pay your bills.

Since it is your bank or you that is initiating the transaction, no one else has your bank account information. You avoid the situation of an overzealous billing computer accidentally emptying out your account with a dozen duplicated payments. You also do not have a personal check sitting outside in your unguarded mailbox.

With online bill pay you control how much is deducted from your account and when. You can set up a recurring monthly payment to pay your rent or mortgage on a certain day of the month and the bank will automatically send a check each month. For service providers that have an agreement with the bank, an ACH transaction that is even more secure and faster is usually performed instead.

3. Set reminders to pay your bills

For some of us, we might prefer to keep control of our bill payments to prevent overdrafts, false charges, or missed payments from a processing error.

You can stay on top of your bills by setting reminders on your phone, writing it down in your planner or on your calendar to remind yourself to pay your bills. When the alert goes off, immediately pay your bills so you don’t forget.

Manually paying your bills might take a little more work than entirely automating all your bill payments, but if you take the time to look over the charges and due dates before going online to your bank’s website, you will know the amounts were correct and it was paid on time.

Closing $ense

Paying bills is part of being an adult and with the rise of the internet, personal finance apps, online banking, and automatic bill pay, it is becoming easier to keep track of and pay your bills on time.

One popular recommendation you hear often is to automate your finances. Automate your savings. Automate contributing to your retirement account. Automate your investing with index funds. But if you want to automate your bill paying, be careful.

If you do not review your statements every month, you could be paying for things that you no longer use or you might not catch a billing error. Or you might end up with an overdrawn checking account if you didn’t have enough funds in the account before an automatic payment was made.

I prefer to automatically pay bills that are for the same amount with due dates that are always at the same time each month with the bank’s online bill pay or with a credit card. For bills that are variable, such as credit cards, I prefer to pay them manually through online bill pay via the bank’s website after looking over the statements for mistakes.

To make it easier to get everything paid on time and to be more efficient, my bill paying routine involves setting a reminder on the calendar app on my phone for the 5th of the month and paying all my bills at once. Collect a month’s worth of your bills and find a date that falls before the due dates. But be sure to still look over the statements each month still in case a due date has changed, which recently happened with our electric bill.

Do you pay any of your bills automatically? Do you use online bill pay? What are some ways you save time when paying your bills?

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