How Autopay Works & When to Consider Using It
Do you ever have trouble keeping up with when bills are due and paying them on time? Welcome to the club. It can be a challenge for many busy people, but paying bills on time is important. Doing so helps you dodge those pricey late fees and maintain your credit score.
For many people, a solution to this challenge is to set up automatic bill payments. This can be done through an automatic payment system, usually referred to as “autopay.” This means that, without needing to remember any dates, write any checks, or click on any payment links, your recurring bills are seamlessly taken care of.
This can be a game-changer that helps you enjoy stronger financial management status and less money stress. But it might not be right for everyone. As with most financial tools, there are pros and cons to using autopay.
So what is autopay? And how do you set it up? Learn the answers to these questions, along with the pros and cons of autopay, so you can determine whether to consider using this option.
What Is Autopay?
What many people call “autopay” is a scheduled, regular transfer of money, usually monthly. These payments are generally transferred from the payer’s bank account (or credit card) to a vendor, or what is known as a payee.
When you link an account to a particular bill or vendor, autopay usually works over an electronic payment system called ACH.
Autopay is typically set up in one of two ways.
• The first is through the company receiving the payment.
• The second is through a bank’s online bill-pay portal.
When you link an account to a particular bill or vendor, autopay usually works over an electronic payment system called Automated Clearing House (ACH). Sometimes automatic payments are referred to as “ACH payments” instead of autopay. If you were to use your credit card, the recurring payment would simply show up as a charge on your card.
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How Does Autopay Work?
Here’s a closer look at how autopay works. When autopay is set up, you are authorizing debits to occur on a regular basis. You will not be responsible for sending the funds. Some people may see this, however, as not being in control of their money.
When autopay is set up, either the payee is authorized to deduct funds from your bank account or your bank will send the funds for you.
You do need to pay attention to when your funds are whisked out of your account. If you aren’t on top of your finances, you could wind up in overdraft and getting assessed overdraft or NSF fees, plus late charges.
Autopay vs. Scheduled Payments
You may hear the terms autopay and scheduled payments used interchangeably but they are actually quite different.
• Autopay means that payments have been set up in advance to happen regularly on a certain date. You establish the date and the frequency and then don’t need to do anything else to transfer the funds on a recurring basis.
• With a scheduled payment, however, you are manually setting when you want a payment to be made and for how much. You can do this regularly, of course, but it requires more effort on your part to transfer funds.
Autopay vs. Bill Pay
Here’s another situation in which you may hear two terms (autopay and bill pay) used interchangeably. There is a slight difference, however.
Bill pay refers to the process in which your bank initiates payments from your account to the payee. In other words, the payee is not authorized to go in and deduct the money; your bank is instead providing this service.
Setting Up Autopay
Here is some more detail on setting up autopay so you can have your bills taken care of more easily.
1. Looking at Vendor Requirements
You can think of autopay as either pushing money from your account to the vendor, or the vendor pulling money from your account.
Many vendors require you to set up autopay through their website, so your first step may be to look into their requirements. If you are currently receiving a paper bill, they often include instructions on where you can go online to set up autopay — looking there is a good place to start.
For example, if you have a $1,800 monthly mortgage payment, you may be able to provide your mortgage company with your checking account information (such as your bank account number and routing number). They can pull the money for payment automatically. This is the “pull” version of automated payments as the vendor is pulling the money out.
2. Choosing the Day Your Payment Is Made
You generally get to choose the day that the payment is made — you could consider doing this a few days before the bill is due. This should give the automated payment time to move through the ACH system, including when the due date lands on a weekend.
Also, you’ll likely want to be cognizant that you aren’t setting up any automatic payments until you’re sure that any necessary deposits are made. For example, if you need your paycheck to cash before making a rent payment, making sure to give your paycheck at least a few days to settle in your account may be the pragmatic choice. Or you could see if the payee is willing to move your bill’s due date slightly to better accommodate your needs.
Setting Up ACH Payments
Another potential option is to set up an ACH transfer through your bank; this is the bill pay option mentioned above. Doing this typically requires logging onto your bank account’s website and navigating to the bill pay section.
If you go through your bank, you may need to provide them with the information for the vendor, such as the account number and mailing address. You can usually find this information on your bill or monthly statements.
Using the same example as above, you would enter the information for your mortgage lender into your bank’s bill pay portal. Similarly, the money would be sent via ACH on the date you’ve picked to send the money to the vendor.
You may want to consider selecting a date a few days prior to the due date to avoid a late payment. This is the “push” method of automated payments as you are pushing the money out of your account to the vendor.
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Pros and Cons of Autopay
Autopay can be a wonderful tool for many people looking to simplify their finances. But it won’t be for everyone. Here’s a look at some of the pros and cons of using autopay.
Pros of Autopay
Consider these upsides of autopay:
Convenience: Gone are the days of sitting down to write a check for every last outstanding bill. In fact, these days you don’t even need to log into a computer every time a bill comes due. With autopay, you can pay all or most of your bills without lifting a finger.
This means no more having to log online to pay bills while you’re on vacation or busy with work or family. There is something beautiful about the convenience of the “set it and forget it” method to financial management, if you can make it work.
Improving Your Finances: We don’t need to tell you that it is a smart idea to pay your bills on time.
Not only can autopay help you to avoid frustrating late fees, but taking care of your bills right away may help you to avoid agonizing or allowing it to take up precious room on your to-do list.
Paying your bills on time may help your credit score.
Also, paying your bills on time may positively impact your credit score. Currently, debt payment history is the single biggest factor in terms of determining your score. It makes up 35% of a FICO®️ Score.
That means that paying debt-related bills, such as a mortgage, car loan, or credit card bill, on time, could potentially positively impact your FICO®️ Score.
Learning Good Behavior: If you can take the philosophy behind automatically paying your bills and apply it to your savings strategy, this may help your overall financial success. Just as you can automate the payment of your bills, you can automate your savings to retirement and other savings accounts.
If you don’t automatically set money aside, it can be far too easy to spend the money that lands in your checking account. Warren Buffett famously recommended that people “spend what is left after saving, do not save what is left after spending.”
Other ways to use automatic payments? Pay down debt aggressively or save for your future (even beyond a 401(k) if you have one). In either of these scenarios, you could simply set up an automatic transfer of funds as you would with autopay, but direct the funds toward your financial goal.
That way, the money is whisked from your checking account before you’ve even had the chance to consider spending it.
Potentially Saving Money: Vendors and service providers want to get paid on time. Therefore, some vendors or service providers offer a discount for customers that set up autopay, which could save you money.
For example, you may receive an interest rate discount if you set up autopay for a loan. Other vendors may provide a discount on their product or service if you use autopay.
Recommended: Understanding ACH Transfer Limits
Cons of AutoPay
Now, for the potential downsides:
Possible Overdraft Fees: If there isn’t enough money in your account to cover a bill, an ill-timed automatic payment could cause your account to overdraft. According to the FDIC (Federal Deposit Insurance Corporation), overdraft fees can average $35 a pop, depending on your bank.
You’d need to be especially careful if you leverage multiple checking or savings accounts with fluctuating balances or tend to keep your account balance close to zero. In the latter situation, you might benefit from keeping a cash cushion in your account.
Late Fees: Consider the transaction time when setting up your autopay in order to avoid annoying late fees. Late payment fees will vary by vendor but could be costly.
While giving yourself, for example, a four-day buffer could be a good start, it’s important to check with each vendor to determine their recommended timeline. Finally, after you’ve set up autopay, monitoring payments during the first few months to be sure they happen on time can help ease the transition.
Potentially Reinforcing Bad Habits: For some people and in some specific cases, it may not be a good idea to have your finances on autopilot. For example, those who are actively paying off credit card debt may want more control over how much they pay towards their debt each month.
There is almost always an option to autopay the “minimum payment” on a credit card, which may be tempting. There is no penalty when you pay the minimum payment, so it is certainly better than doing nothing.
But, it is much better to pay off the balance in full, if possible. When you do not pay the balance in full, the card will accrue interest, costing you money over time.
If you aren’t at a place where you can pay off the entire balance quite yet, you may want to try and set your autopay for an amount that’s more than the minimum payment so you can make progress on the balance. (And you may want to try to stop using your card in the meantime if this is the case.) If this won’t work for you, you may want to remain in manual control of payments.
Paying for Things You Don’t Need: Subscription services are sneaky. Amounts may seem small and you hardly notice them on a monthly basis, but they can wreak havoc on your annual budget. It is too easy to forget that you are paying for something, especially when you don’t use the service.
If you take advantage of the perks of autopay, don’t forget to reassess your subscriptions every few months to determine whether you actually need the thing you’re paying for. One example: You might not realize how much entertainment you are signed up for, and could save money on streaming services by dropping a platform or two.
Potentially Less Monitoring of Your Accounts: One issue with using autopay could be that you develop a sense of false security that your personal finances are running just fine. You might not check in with your money and review your spending as often as you might. This could have a negative impact. How often should you monitor your checking account? For many people, a couple or a few times a week is a good pace.
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Should You Use Autopay?
The digital age can be confusing and overwhelming, but this is one case where it may help to simplify our lives. Managing money can be a tedious task, and paying bills is just one part of it.
By streamlining the bills portion, you may find that using autopay gives you more freedom to focus your attention on other financial goals.
That said, autopay won’t be right for everyone and in every circumstance. For example, autopay might not be a great idea for those who haven’t organized their bills and tend to overdraft their accounts. It may not make sense for someone who is between jobs or out of work.
Autopay could potentially be difficult to manage for freelancers or other workers with variable income throughout the month. Ideally, a person would have some cash buffer for bills in any of these scenarios, but that is not the way it always works out in the real world.
💡 Quick Tip: When you overdraft your checking account, you’ll likely pay a non-sufficient fund fee of, say, $35. Look into linking a savings account to your checking account as a backup to avoid that, or shop around for a bank that doesn’t charge you for overdrafting.
The Takeaway
Autopay can be a convenient way to get your bills taken care of with less time, energy, and stress. However, in some cases, it can have its downsides, so it’s wise to know the pros and cons and continue to monitor your money carefully if you do sign up for autopay.
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FAQ
What should you not put on autopay?
It can be wise not to put bills that fluctuate on autopay. You are less likely to wind up with an overdraft situation that way. For instance, if your energy bill is usually $100 a month but goes up to double that during the winter or summer, that might throw off your personal finances if you autopay your bills.
When should I set up autopay?
It can be wise to set up autopay when you are familiar with your finances and cash flow and feel confident that automating your payments won’t lead to an overdraft situation. You might also consider signing up if there is a bonus or perk for you, such as a discount or a lower interest rate.
Why do people not use autopay?
Some people do not feel comfortable with autopay; they would rather be in control of making payments individually and maintaining that control over their finances. Also, some people may have bills that fluctuate considerably and they may therefore prefer to pay manually to avoid overdrafting.
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