Definition and Examples of Automatic Bill Payments
How Automatic Bill Payments Work
Advantages and Disadvantages of Automatic Bill Payments
Definition and Examples of Automatic Bill Payments
Automatic bill payment is a scheduled electronic transfer of funds to pay a bill from your bank account or credit card to a seller, creditor, or merchant. You can set it up in minutes directly through the company you are paying or you can enroll in online bill payments through your bank.
Automatic bill payment allows consumers to schedule automatic payments for loans, credit cards, services, utilities, and more. You can schedule payments for the due date or any day before it. It provides convenience and prevents late payments and late fees, thus potentially improving your credit score.
Typically, creditors and merchants with online billing gateways offer an automatic payment option that can be completed online. However, sharing your financial account information carries some risks, and using automatic payment can incur overdraft fees and overspending if you do not monitor your account.
How Automatic Bill Payments Work
Automatic bill payments use electronic funds transfers (EFT) to move money from one account to another. You can set up automatic payment services online or through a mobile app. Additionally, some companies may allow users to arrange automatic payments over the phone or by mail.
While many third-party applications facilitate automatic payment, the two simplest ways to link your accounts for bill payment arrangements are:
Online payment through your bank: Most banks offer online bill payment services. In this way, you start the process and schedule a transfer of funds from your account to pay a vendor. To get started, you add the beneficiary account information, choose when and how much to pay them, and specify which account the funds will be withdrawn from. Avoid sharing sensitive bank account information with the entities you are paying.
Automatic payment through the vendor: With this approach, you give the vendor permission to withdraw funds from your account to pay a bill. To set up automatic withdrawals, you will need to provide your bank account information and routing number, or your debit or credit card number (just make sure to check if you will incur additional fees for using a credit card). In some instances, you can set up automatic payment using a payment provider like PayPal. Through that, you give the company permission to regularly withdraw funds from your bank account or payment provider or to charge your credit card.
Note: When setting up automatic bill payments through your bank, be sure to consider the processing time to avoid late payment fees.
Once set up, you can rely on all future recurring payments to be made on time. This approach provides a “set it and forget it” convenience for bill payments, preventing late fees. Moreover, since the payment history accounts for over two-thirds of your credit score, timely regular payments can positively impact your credit score.
However, if the account has a low balance when the automatic payment is made, there is a risk of incurring overdraft fees or insufficient funds. Specifically, if the payment amount varies from month to month, it may be harder to budget for and increase the likelihood of overdrawing your account.
Note: Creditors make mistakes, so it is possible to receive double bills or that a canceled automatic payment may occur. Some companies enroll users automatically in automatic payment as part of their terms and conditions. All these reasons make it essential to review your accounts regularly.
Advantages
Disadvantages of Automatic Bill Payment
While automatic bill payment applications come with many benefits, they also carry a certain amount of risks. Here are some advantages and disadvantages to consider:
Advantages:
- Convenient and Simple: Signing up for automatic payment usually takes just a few minutes, and the process is relatively similar for most companies. After that, it requires minimal effort to maintain your payments.
- Helps prevent late payments or service interruptions: There’s no need to worry about remembering to pay a bill by the due date once automatic payments are set up – the system does it for you. As long as you have enough money in your bank account to cover the bill, you won’t face any service interruptions.
- Can save money: Automatic bill payment helps ensure bills are paid on time, which helps you avoid late fees. And because payments are made electronically, if you were sending your payments by mail, you could save money on checks and stamps.
- May improve your credit score: Payment history significantly contributes to a positive credit score, so regular, on-time payments can improve your credit score over time.
Disadvantages:
- Risk of fees: If you have a low account balance when the automatic payment is processed, you run the risk of incurring overdraft fees or non-sufficient funds fees or returned payment fees.
- Vulnerable to data breaches: When you enroll in automatic payment through a vendor, you allow another company to store your personal information, including your bank account or credit card numbers. If that company suffers a data breach, there’s a chance your financial information could be compromised.
- Unexpected costs: Once you allow a vendor to withdraw funds from your account, there’s a risk of incurring unexpected costs. For example, you might be charged for a service you canceled, or a creditor may make a billing error or an annual subscription you forgot about may get posted.
- May lead to overspending: Without a defined budget, there’s a chance you may forget some recurring automatic payments and overspend out of your account.
Key Takeaways
Automatic bill payment allows consumers to pay bills electronically from their bank accounts, payment providers, or credit cards.
Payments can be set up as one-time or recurring and can be scheduled for the future.
Automatic payments are convenient, prevent late fees, ensure timely payment, and can boost your credit score.
Consumers using automatic payments with low account balances are at risk of incurring overdraft fees, non-sufficient funds fees, or returned payment fees.
Source: https://www.thebalancemoney.com/what-is-an-automatic-bill-payment-5204676
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