Automatic bill payment, or auto pay for short, allows you to pay bills automatically and avoid fees. Different kinds of bills will call for different kinds of auto pay. With a bill that fluctuates from month to month, auto pay should be set up through the provider to ensure you’re always paying the full amount of the bill as it changes.
This is particularly important for bills such as electricity, water, and internet services, where you are less likely to be able to carry a balance. For services with a flat monthly cost, you can set up auto pay through your bank and indicate the flat amount that should be sent via check each month. Before signing up, you should take some time to understand how the service you want to use works and evaluate any potential consequences of using it.
How Does Automatic Bill Payment Work?
There are two different ways to pay your bills automatically:
1. Through The Service Provider
Many subscription services allow consumers to opt-in to automatic bill payment programs. This means that, instead of waiting to receive a bill to make a payment on your account, the service provider charges the payment method it has on file for you. You may associate this type of billing with newer subscription services such as Netflix and Amazon Prime, but more traditional service providers such as internet recognize the convenience of auto pay for their customers.
This is different than using auto pay through your bank, as you will need to give either your credit card or bank account information to the provider. If you set up auto pay using a bank account, you should ask your bank if there are any fees associated with returned automatic check payments (ACH, the banking industry standard electronic system for sending money between accounts) in case the provider makes an ACH withdrawal when you don’t have the necessary funds in your account. Alternatively, if you already maintain a credit card and have an established payment routine, you may consider adding this card to all of your auto pay accounts. This way, you will pay a single bill (the credit card’s) with a single due date, once a month.
2. Through Your Bank
Many banks offer an online bill pay service that lets consumers schedule recurring or one-time payments to an unlimited number of payees. Depending on whom you’re paying, the money will either be transferred electronically with an ACH payment, or through the mail using a physical check. Regardless of which method is used, the bank typically guarantees that the payment will arrive by the date that you specify.
One benefit to this method is that there’s no need to share your banking or payment information with any individual or company.
To set up an automatic bill payment through your bank, you’ll typically be asked to provide:
- Payee name
- Payee address
- Payment amount
- Payment frequency
Why Use Auto Pay?
- Avoid fees and late penalties: You will avoid late payment fees and interest rates because the bill will be paid automatically on the date you specify (on or before the due date).
- Feel in control: Paying on time is good for your credit ratings and can help you feel more in control of your expenses.
- Peace of mind: You’ll avoid that anxiety-inducing feeling that we all know well: “wait, was that bill due today?”
- Everything in one place: If you use your bank’s auto pay service or provide a credit card on a service provider’s website, you will be able to see all of your bills and their payment status using just one website or application from your bank or card provider.
- Establish good bill payment habits: When you put off paying your bills, you artificially inflate your finances. While it may be convenient to carry a balance for a month or two to free up funds for other things, it’s very easy to put yourself in a difficult situation. Auto pay creates automatic discipline.
Tips for Automatic Bill Payment Success
- Use auto pay with a fixed amount bill, but keep an eye on changes: Your internet bill, utilities bill, college loan bill — anything with a fixed monthly amount — are all great for auto pay because you can feel confident budgeting for them without changes from bill to bill. Keep in mind that any purchases you make through a given service will be reflected in your bill, so for instance, if you buy or rent movies through your cable box, make sure you budget for that.
- Audit your subscriptions: Check your monthly statements to determine if you are paying automatically for services that you no longer need. There are even tools that will help you find and cancel subscriptions you no longer need: try Truebill, Clarity Money, or Trim.
- Test run your auto pay: See how it works by paying yourself. Designate an automatic monthly deduction from your checking account into a savings account. You’ll see how it works and build up some savings at the same time.
- Activate alerts for your bank account: Most banks offer text or push notifications for certain types of activity. At the very least, enable alerts for overdrawn balances and declined purchases. If you want to stay even more informed of your finances, turn on alerts for any charge so you’ll know exactly when money is being withdrawn from your account by service providers.
- Balance a budget: Automatic bill payment works best when you understand your budget. If you know your income and expenses, you can rest assured that auto pay won’t overdraw your account or cause you to carry balances on a credit card.
- Pay more than the minimum: If you use auto pay for credit card bills, set your payment amount higher than the minimum, otherwise you will end up paying a significant amount of interest, even if your payment is on time every month.
- Use overdraft protection: This is particularly important if your deposits come at different times every month. Connect your savings account to your checking account so that money can be added in the case of insufficient funds.
Like with any other contract, make sure you read the fine print before you decide to sign-up. Be aware of service charges, surcharges, and penalties, and get acquainted with the dispute-resolution policies in case you run into problems with a merchant or provider.