Automatic Bill Payments: What You Need to Know

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What is Automatic Bill Pay?

Automatic bill pay is a money transfer from your financial institution account to the bill issuer, scheduled on a recurring date and frequency of your choosing. You can set up autopay on a variety of platforms, including banks, credit unions, credit cards, and directly with vendors. 

Autopay works for nearly any type of bill. However, it’s best utilized for consistent monthly payments with little fluctuation. Most people use autopay for the following types of statements: 

• Mortgages 
  
• Utilities 
  
• Car loans 
  
• Student loans

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How Does Automatic Bill Pay Work?

The automatic bill payment process is relatively simple. Once you’ve set up your autopay preferences through a vendor, bank, credit union, or credit card, your payments are automatically completed as scheduled through an ACH payment or credit charge. 

ACH payments

ACH stands for the Automated Clearing House — an electronic funds transfer system that you likely already use. For example, if your job uses direct deposit to pay you digitally rather than with a paper check, that’s an ACH payment. Once you provide a payment source and schedule, ACH takes care of the rest through automatic money transfers. 

Credit charges

A credit charge is run for autopay when set up through a credit card processing company. Instead of manually entering your information or swiping your card, your credit card information is stored and runs automatically on a set date.

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How to Set Up Automatic Bill Payments

You can easily set up automatic bill payments in person, over the phone, or online through the bill’s vendor, your financial institution, or your credit card by providing the necessary information and agreeing to a payment schedule. For example, common payment options include paying the full bill amount (statement balance in credit card speak), interest-saving balance, or a minimum or fixed amount. 

Here are three ways to pay your bills automatically: 

 

1. Set up autopay with vendors

You can set up autopay directly with a vendor, like your utility company or auto lease provider, by entering your financial account and routing numbers and selecting your recurring payment date. 

 

2. Set up autopay with a bank or credit union

Many banks and credit unions have the power to manage your bill payments straight from your checking account. You can set this up by logging in to your online account and indicating who to pay, how much, and when. Some credit unions even offer automatic payment discounts when you set up automatic payments for specific bills, such as credit union loans.

 

3. Set up autopay with a credit card

Using your credit card for autopay is similar to a direct setup with a vendor. However, you will enter your credit card information rather than your bank account information. Then, the vendor will automatically run a charge on your card. From there, you will pay your credit card bill when it’s due (a bill you could also set to autopay through your bank account. Double autopay!). 

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Advantages and Disadvantages of Using Automatic Withdrawal to Pay Bills

While autopay is an easy way to save time, it’s essential to understand that there are advantages and disadvantages of using automatic withdrawal to pay bills. For example, you’ll need to keep in mind that setting up autopay empowers these institutions to make payments on your behalf, whether you took the time to look at the bill or not. 

Here are some further factors to consider: 

Advantages of automatic bill payments

Automatic bill payments have many advantages to help you save time and stay on track with your financial goals. They include:

• Avoid late payments. We can all be forgetful, but when that forgetfulness applies to paying your bills on time, it can result in some hefty late payment fees. Autopay makes sure you’re always on time and don’t incur any fees or other penalties.
  
• Improve credit score. Consistently missed or late payments can take a toll on your credit score. Setting up autopay can help you improve your credit score — an important metric in determining loan interest rates, monthly payment options, and more. 
  
• Achieve peace of mind. Setting up consistent automatic online bill pay can be a great way to reduce your mental load and not have to think about the task each month. 
  
• Earn perks. Companies like loyal customers, and some will reward your commitment to autopay with product discounts, bonus points, and other rewards.

Disadvantages of automatic bill payments

While autopay has many great features, it’s not always the right choice for everyone’s financial needs. Here are a few reasons why you may want to take a close look at whether or not you’d like to pay your bills automatically:

• Lose track of scheduling. Double booking a lunch-hour appointment is one thing, but misaligning funds is another. It could create financial stress if you don't correctly schedule autopay dates around your paydays. 
  
• Incur an overdraft. An overdraft is a negative account balance that occurs when you spend more than you have. Autopay schedules don’t look at your available funds, so an improperly timed payment could result in late or returned payment fees. 
  
• Overlook fraud. With autopay, you don’t have to check into your account to pay bills. However, that convenience could cause you to fail to identify account errors or fraud. You may miss an accidental double charge or even early clues that your credit card is compromised.

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When to Set Up Automatic Bill Pay and When Not To

As we’ve learned, just because you can pay your bills automatically doesn’t mean you always should. Here are some examples of when the service can be helpful and when it’s best to shift into manual gear: 

When automatic payments are beneficial

Under these scenarios, autopay will likely be beneficial to your financial goals:

• Same monthly payment amount. Autopay is best used for consistent monthly payments with little-to-no fluctuation, like a mortgage or car loan, where the bill is the same amount every month. 
  
• Cushioned checking or savings account. You may be a good candidate for autopay if you have enough cash in your checking account to cover those rainy-day expenses. The ample funds will help prevent overdrafts when payments are higher than expected. 
  
• Consistent flow of money. Autopay is a great asset for individuals who can rely on regular deposits into their accounts, like those with a set salary with scheduled direct deposit payments.

When automatic payments aren't beneficial

Here are some scenarios when autopay may not be beneficial to your financial goals:

• Varied monthly payment amounts. Things like credit cards and utility bills can change month to month. If you don’t have a good idea how much the bill will be, you could run into overdraft fees. 
  
• Inconsistent flow of money. Entrepreneurs and gig workers may experience income fluctuations from time to time and need to plan payments accordingly. If your money intake is irregular, autopay may not be the best option.
  
• Temporary services. Autopay is excellent for consistent payments like rent. However, autopay set up for inconsistent services like meal delivery, streaming, and clothing subscriptions could lead you to pay for something you don’t even use or forgot you signed up for in the first place.

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Further Resources on Automatic Bill Payments

If you still have questions about how to pay bills automatically or how autopay can impact your financial planning, check out these websites for more autopay tips and tricks. 

• Make a plan. Consumer.gov provides budget worksheets to plan your monthly expenses. 
  
• Know your score. AnnualCreditReport.com gives you a free annual credit check so you can work to improve your score. 
  
• Get the latest tips. MakingSenseOfCents.com offers money-saving tips and tricks. 
  

As you can see, there are a lot of advantages and disadvantages of using automatic withdrawal to pay bills, depending on your financial goals and needs. If you decide it’s the right option for you, automatic bill payment with a credit union can be an excellent way to declutter your financial to-do list. Use our Credit Union Locator to find a branch near you and get started. 

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