What Is an Automatic Bill Payment?
An automatic bill payment is a money transfer scheduled on a predetermined date to pay a recurring bill. Automatic bill payments are routine payments made from a banking, brokerage, or mutual fund account to vendors.
Automatic payments are usually set up with the company receiving the payment, though it’s also possible to schedule automatic payments through a checking account’s online bill pay service. Automatic bill payments occur over an electronic payment system, such as the Automated Clearing House (ACH).
Key Takeaways
- An automatic bill payment occurs when money is automatically transferred on a scheduled date to pay a recurring bill, such as a mortgage, credit card, or utility bill.
- Individuals can set up an automatic bill payment through their online checking account, brokerage, or mutual fund to pay their monthly bills.
- Advantages of automatic bill payments include the ease of automated payment, the ability to avoid late payments, and the potential to maintain or improve your credit score.
- Disadvantages of automatic bill payments include the difficulty in canceling them, the need to keep adequate funds in your checking account, and the potential of incurring a returned payment or late fee.
How an Automatic Bill Payment Works
Automatic bill payments can be scheduled for all types of payment transactions. This can include installment loans, auto loans, mortgage loans, credit card bills, electric bills, cable bills, and more. These payments can be automated quite easily from a checking account.
Setting up automatic bill payment involves making arrangements with the bank holding the checking account to make the exact payment each month. The set of instructions is typically created online by the account holder. More frequently, this power is given to the vendor (the utility company, for example) to charge the checking account for whatever amount is owed that particular month. In both cases, the individual paying the bill must initiate the automatic bill payment and provide the necessary information required to make automated recurring payments.
Pros
Payments are easy to automate from a checking account.
Organizing automatic bill payments helps you avoid late payments.
Paying automatically (and always on time) helps you improve or maintain a good credit score.
Once payments are set up, you don’t have to keep doing the task each month.
Cons
If you don't keep a cushion in your checking account, an automatic payment could bounce.
You may incur a returned payment fee or late fee.
You could miss catching mistakes or fraud because the payment is automatic.
Automatic payments can be difficult to cancel.
Example of an Automatic Bill Payment
Automatic payments save consumers the hassle of having to remember to make a payment month after month. They can also help consumers avoid late payments.
For example, suppose you have a $300 car payment due on the 10th of every month for the next 60 months. Instead of logging into your online account with the auto loan company to schedule the same payment each month, you could set up automatic payments one time and agree to have $300 automatically transferred from your checking account to the auto loan company on the fifth day of each month. This way, you know your payment will never be late, and you’ll avoid the trouble of doing the same task each month. You'll also improve—or maintain—a good credit score.
Disadvantages of Automatic Bill Payments
Automatic payments have a couple of potential downsides. If you forget about your scheduled automatic payments and do not maintain a cushion in your checking account, an automatic payment could bounce. Not only will your bill remain unpaid but you might also incur a returned payment fee from the company you were trying to pay, as well as a late fee for missing the due date. And automatic payments aren’t infallible. You still need to check regularly to make sure your scheduled payments have gone through as expected.
Another problem can occur when you authorize automatic payments that vary in amount. For example, suppose you set up automatic payments of your credit card bill from your checking account. If you don’t look at your credit card bill when it arrives, you might have an ugly surprise when it’s automatically paid in a much higher amount than you expected because of a mistake or fraud—or because you simply didn’t realize how much you had spent.
Automatic payments can also be difficult to cancel. Additionally, consumers might forget about certain automatic payments and continue to pay for services that they no longer want.
FAQs
What Is an Automatic Bill Payment? An automatic bill payment is a money transfer scheduled on a predetermined date to pay a recurring bill. Automatic bill payments are routine payments made from a banking, brokerage, or mutual fund account to vendors.
What are the advantages and disadvantages of automated bill payments? ›
Let's take a look at the 4 pros and cons of automatic payments for businesses.
- Pro: Automatic Payments Save Time. ...
- Pro: Can Improve Cash Flow. ...
- Pro: Better Customer Experience. ...
- Pro: No Late Payments. ...
- Con: Autopayments Can Be Inflexible. ...
- Con: Less Engagement with Customers. ...
- Con: Can Be Difficult to Set Up.
What Is an Automatic Bill Payment? An automatic bill payment is a money transfer scheduled on a predetermined date to pay a recurring bill. Automatic bill payments are routine payments made from a banking, brokerage, or mutual fund account to vendors.
Is auto pay for bills a good idea? ›
Automating your bill payments via online bill pay or autopay can simplify your financial life. Making payments on time can help improve your credit score too.
What are the benefits of autopay? ›
Pros of Automatic Payments
Instead of having to remember to mail a payment or log onto an account each month, you can relax and let your bank or biller take care of things. You also won't have to worry about late fees. Automatic payments can even help you build a history of on-time payments and boost your credit score.
What are the disadvantages of auto pay? ›
The Pros and Cons of Autopay
- Pro: On-Time Payments. Automatic bill pay means your bills are scheduled to be paid automatically, and on time, every month. ...
- Con: Potential Overdraft Fees. ...
- Pro: Builds Credit. ...
- Con: Potential Billing Mistakes. ...
- Con: Potential Identity Theft. ...
- Pro: Good for the Environment.
Advantages and Disadvantages of Automation
| Advantages of Automation | Disadvantages of Automation |
|---|
| Improved accuracy and quality | Initial implementation costs |
| Enhanced efficiency and cost savings | Technical challenges and limitations |
| Increased safety | Reduced human interaction and customer experience |
2 more rowsJul 4, 2023
While some lenders might charge an origination fee — which is an upfront cost — a few offer a rate discount if applicants set up autopay for monthly payments. And when it comes to your loan, Autopay's lenders do not charge a prepayment penalty. So you can pay off your loan early without extra fees.
Is it better to do automatic payments? ›
Automatic payments could help your credit score, but only if you time the payment to happen before the credit card's statement due date and around the same time you know there will be enough money into your bank account.
What are two ways to automate bill paying? ›
A customer can schedule an automatic bill payment in several ways: through their bank/financial institution, through a vendor's website, or through cloud-based accounting software, to list a few. Regular payments can be authorized through the credit card, debit card, checking/savings account, or money market account.
Some payments fluctuate in amount, and if you're not careful, your account may be overdrawn. Overdraft fees vary by institution, but the median is $34. Keep tabs on your bank account and have enough in there to cover all your automatic payments.
Is automatic payments safe? ›
Autopay services are safe. However, since enrolling in automatic payments involves providing your bank or credit card account information, make sure the company is one you know and trust.
Why do companies prefer autopay? ›
Whatever it is, the overall amount of time is drastically reduced with the addition of auto-payments. No more mailing out paper invoices every month, manually recording checks, or spending time repeatedly following up with late payers.
What bills should you never put on autopay? ›
Don't: Set your utility bills on autopay. Heat and water bills can clue you into how much you're really using. For example, if you have a higher water bill, that might indicate that you have a leak somewhere that's costing you a lot of money. These bills are safer to pay manually month-to-month.
What happens when you turn off autopay? ›
Cancelling an automatic payment does not cancel what you owe
If you cancel an automatic payment on a loan, you still have to make payments on the loan using another payment method.
Is it better to use debit card or bank account for autopay? ›
One of the best benefits of autopaying your bills with your debit card is that you have a more accurate, real-time picture of your financial standing. With credit, you can always tell yourself you have more money than you actually do — but that money comes due, with interest.
What is a disadvantage of using electronic payment for bills? ›
What are the drawbacks of electronic payments? Technical issues, security risks, limited consumer protection, and fees are some of the drawbacks of virtual payments. Virtual payments are also dependent on internet access and may be unavailable in areas where access to the internet is limited or unreliable.
What are three general disadvantages of using automated systems? ›
The risks include the possibility that workers will become slaves to automated machines, that the privacy of humans will be invaded by vast computer data networks, that human error in the management of technology will somehow endanger civilization, and that society will become dependent on automation for its economic ...
What are some disadvantages of electronic payment? ›
The reliance on technology for digital payments exposes businesses to the risk of disruptions. Technical glitches, server downtimes, or system failures can temporarily halt transactions, leading to potential financial losses for businesses and inconvenience for customers.
