Automatic bill payments allow consumers to arrange electronic money transfers from their bank account, payment provider, debit, or credit cards to pay bills. Payments can be set up on a one-time, future, or recurring basis.
Consumers can enroll in automatic payments to almost any lender, creditor, merchant, subscription, utility company, or service provider. Autopay can provide convenience and prevent late fees.
Learn how automatic bill payments can save you time and money and what to watch out for after setting up autopay.
Definition and Examples of Automatic Bill Payments
An automatic bill payment is a scheduled electronic transfer of money to pay a bill from your bank or credit card account to a vendor, creditor, or merchant. You can set one up in a matter of minutes directly through the company you’re paying, or you can enroll in online bill pay through your bank.
Automatic bill pay allows consumers to schedule automated payments for loans, credit cards, utilities, services, and more. You can schedule payments for the due date or any day prior. It provides convenience, prevents missed payments and late fees, and can thus improve your credit score.
Creditors and merchants with an online billing portal usually offer an automatic bill payment or autopay option that can be completed online. However, sharing your financial account information carries some risk, and using autopay can trigger overdraft fees and overspending if you don’t monitor your account.
• Alternate name: Autopay
If you have a monthly credit card bill due, you can log into your credit card account online and find the feature to enroll in automatic bill payment. First, you’ll need to input your bank account information, payment frequency, and the amount you wish to pay. Once that’s completed, you won’t need to worry about remembering to pay your credit card bill online because the payment has been scheduled for you automatically.
How Automatic Bill Payments Work
Automatic bill payments use electronic fund transfers (EFT) to move money from one account to another. You can set up autopay services online or through a mobile app. In addition, some companies may allow users to make autopay arrangements by phone or mail.
While several third-party apps facilitate automatic payments, the two most straightforward ways to link your accounts for bill payment arrangements are:
- Online bill pay through your bank: Most banks offer an online bill payment service. With this method, you initiate the transaction and schedule the transfer of money from your account to pay a vendor. To get started, you add the payee’s account information, choose when and how much to pay them, and designate from which account to withdraw money. This method avoids sharing sensitive bank account information with the organizations you’re paying.
- Autopay through a biller: With this approach, you give authorization to a biller to take money out of your account to pay a bill. To set up automatic withdrawals, you will need to provide your bank account and routing number, or your debit or credit card number (just make sure to check if you’ll be charged an extra fee for paying with a credit card). In some cases, you can set up autopay using a payment provider like PayPal. By doing so, you’re giving the company permission to remove money from your bank or payment provider account or charge your credit card on a regular basis.
When setting up automatic bill payments through your bank, be sure to factor in processing time to avoid late payment fees.
After the one-time set-up, you can count on all future recurring bill payments being made on time. This “set it and forget it” approach to paying bills provides peace of mind and convenience, and prevents late fees. In addition, since payment history makes up more than one-third of your credit score, regular on-time payments can positively affect your credit score.
However, if an account has a low balance when an automatic payment hits, there’s a risk of incurring overdraft or insufficient funds fees. In particular, if the payment amount fluctuates from month to month, it can be harder to budget for and can make the chance of overdrafting a bit higher.
Creditors make errors, so it’s possible you could get double-billed, or a canceled auto-payment could still occur. Some companies auto-enroll users into autopay as part of their terms and conditions. All of these are reasons why it’s essential to review your accounts regularly.
Setting up automatic bill payments can help you pay off debt and maintain a budget. For example, suppose you have a no-interest credit card balance of $3,000 that needs to be paid off in 12 months. Instead of setting reminders for yourself to pay $250 by the due date every month, you can set up automatic payments through the issuer’s online portal.
Autopay enrollment for credit cards usually gives you options to pay only the minimum payment, a fixed amount (greater than the minimum payment), or the last statement balance. In our example case, you could select a recurring fixed payment of $250 every month. Then, set your own reminder to cancel the automatic payments once that card is paid off at the end of 12 months.
Pros and Cons of Automatic Bill Payments
While automating the bill-payment process has many benefits, it also comes with a certain amount of risk. Here are some pros and cons to consider.
Convenient and simple
Helps prevent late payments or service interruptions
Can save money
May improve your credit score
Risk of fees
Subject to data breaches
Could lead to overspending
- Convenient and simple: Enrolling in autopay usually only takes a few minutes, and the process is relatively the same for most companies. After that, it takes minimum effort to maintain your payments.
- Helps prevent late payments or service interruptions: You don’t need to worry about remembering to pay a bill by the due date once you set up automatic payments—the system does it for you. As long as you have enough money in your bank account to cover the payment, you shouldn’t encounter any service interruptions.
- Can save money: Autopay helps pay bills on time so you can avoid late fees. And since the payments happen electronically, if you’ve been mailing in your payments, you can save 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.
- Risk of fees: If you have a low account balance when an automatic payment posts, you risk incurring overdraft, insufficient funds, or returned payment fees.
- Subject to data breaches: When you enroll in autopay through a vendor, you permit another company to store your personal information, including bank or credit card numbers. If that company is subject to a data breach, then there is a chance that your financial information can be compromised.
- Unexpected charges: Once you permit a vendor to charge your account, there’s a risk you could incur unexpected charges. For instance, you may be charged for a service you canceled, a creditor could make a billing error or an annual subscription you forgot about could post.
- Could lead to overspending: Without a budget in place, there’s a chance you may forget about some of your recurring automatic payments and overspend on your account.
- Automatic bill payments allow consumers to pay bills electronically from their bank, payment provider, or credit card accounts.
- Payments can be set up on a one-time or recurring basis and can be scheduled for future payments.
- Autopay is convenient, prevents late fees, ensures on-time payments, and can boost your credit score.
- Consumers who use autopay with low account balances run the risk of overdraft, insufficient funds, or returned payment fees.