Automatic Payments: Pros, Cons & Other Considerations

Are you looking for a way to reduce the amount of time spent paying bills? Automatic payments offer a hands-off approach while ensuring your obligations are paid on time.

While this method can be used to pay almost any bill, it's more often used for recurring bills that are roughly the same amount each month, such as cellphone bills, internet service, and insurance premiums.^[1]

While automating finances has numerous benefits, there are also some drawbacks. Here, learn the ins and outs of automating your payments to make the most of this financial technology.

What Are Automatic Payments?

Automatic payments (known as “auto pay”) are scheduled money transfers between a bank account and a vendor or company. Consumers frequently set them up to pay recurring bills, such as credit card payments, phone bills, or other subscription services.

The payment can be set up directly with the vendor or company or with the paying bank. Once established, money typically moves from the bank to the payee via an automated clearing house (ACH) payment.

Automatic payments set up through your bank are recurring and for a set amount each billing period. Examples include rent, utilities, or subscription services. You authorize the payment once, and it’s deducted automatically on the specified date. When setting up auto pay with the company directly, the amount may vary depending on what's owed. For example, a phone bill payment could be $55 for one month and $65 for the next, depending on the bill total at the time of scheduled automatic payment.

The Advantages of Using Automatic Payments

Automatic payments have earned a place in customers' financial behaviors because they make paying bills easier. They can also be conveniently scheduled from a bank's bill pay system or directly with the biller. They come with additional convenient benefits, as well.

Save Time and Money

Since many billers don’t charge for a bill pay service (and banks generally don’t chargea large fee, if any), it may be more affordable than paying for postage or driving across town to deposit a check. It also doesn't require you to have a paper check on hand.

What’s more, if you lead a busy life, it makes paying some bills one fewer chore to do each month. Rather than hopping online to make a digital payment each and every month, one automatic payment subscription can last for months or even years.

Reduce Late Fees

If payments are scheduled far enough in advance, they reach the biller on time. This reduces any chance of late payments and the fees that can come with them. Some billers charge a flat fee for late payments ($25, for example). Others, however, can charge a percentage of the billed amount, which can prove costly for larger expenses.

Improve Credit Score

Not all creditors report to the credit bureaus, but many do. Creditors that do report will report whether or not you make your payment on time. Timely payments are a factor affecting your credit score and automatic payments may be the good way for you to ensure timely payments.

Increase Certainty

Sending cash or even a check in the mail carries risks, as there’s no guarantee it will arrive safely. Not only is postal theft a real concern, but a delayed delivery can result in a late payment. Sending a payment too close to the due date may put your payment in jeopardy of actually arriving on time.

When automatic payments are sent electronically, this means not having to worry about outstanding checks. Additionally, automatic payments often go through enhanced payment checkpoints to keep your data safe.

Streamline Financial Management

The average consumer makes 39 payments a month.^[2] With so many payments to track, automating as many as possible may make sense, helping reduce the administrative work of managing finances. Automated bill payments integrate seamlessly into many popular digital budget apps, too.

The Drawbacks of Relying on Automatic Payments

Any financial approach has its downsides, and automatic payments are no exception. These are potential drawbacks that should be considered before setting up any payment schedule.

Risk of Overdraft

Because some automatic payments can vary from month to month, it may be hard to know how much will be debited from your account on the next billing cycle. For example, if you go over on your cell phone data usage, the extra $25 or $30 in charges could potentially go over your budget, putting your bank account at risk of being overdrawn.

Also, you may not be able to easily change the date that the payment is going to be withdrawn from your bank account.  So it is important for you to keep track of when the payment is going to be withdrawn to make sure you have enough money in your account to cover the transaction. If you don’t have enough money in your bank account, you could risk being charged overdraft fees as a result.

Lack of Oversight

The very thing that makes automated payments great is also what can make them risky. By taking a completely hands-off approach to paying bills, it can be tempting to not look at bank transactions or your billing statements at all. This allows fraudulent charges or billing errors to go unnoticed until it’s too late to correct them. Companies can and do make billing mistakes, and relying too much on an automated payment plan may make it easy to miss these errors. It's also easy to forget about recurring subscriptions that are no longer needed. 

Tips for Managing Automatic Payments

After considering the pros and cons of automated payments, you may want to consider taking advantage of its convenience while putting some safeguards in place. Taking a cautious approach toward any kind of automation will likely help you enjoy convenient benefits while still maintaining control over every penny that is spent.

Here are some added tips for success:

1. Know When Payments Are Due

Gather a list of all bills, including amounts and due dates. Know which bills are due on the same date each month (the 27^th, for example) versus the week of the month (the 3^rd Friday of the month). Note if the bill will be the same amount each month or vary according to usage. Also note that some payments cannot be made on non-business days, depending on your bank.

2. Set up Payment Where It Makes Sense

Some companies prefer you set up bill pay from their end, as opposed to through your bank. This can ensure that the payment gets credited for the scheduled day and does not incur late fees. However, scheduling from the bank may make more sense for keeping track of everything, given how use of a single dashboard to track all bills can be convenient.

3. Track on a Calendar

A digital budgeting app can make this task a breeze. Set up recurring bills on the calendar, noting your projected bank balance once those bills are paid.  This prevents your budgeting app from showing money that’s not available to spend. When the money does come out of the bank account, the app should reconcile it automatically.

Note: The automatic reconciliation only works for budgeting apps that connect to bank accounts and have permission to update automatically. If using an offline app, this part must be done manually.

4. Set up Alerts

Many banks have notification systems that send texts or emails when a payment is made. These systems can also alert you to overdrafts, large purchases, or purchases that don’t fit other parameters. Use these alerts to keep tabs on payments between banking sessions.

5. Keep Account Information Current

If something goes wrong, it can be difficult for the bank or biller to contact you if your information is not current. Be sure to regularly check the information on file and update it when it changes.

Automatic Payments Have Their Place

Automatic payments can be an integral part of a sound financial plan.

However, auto pay isn’t a substitute for monitoring accounts and regularly reviewing a budget.

It’s still important to check in often, review purchases, and adjust payments to continue meeting goals.