Automatic Bill Payment

What is an 'Automatic Bill Payment'

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 can be made from a checking account or credit card. They 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).

BREAKING DOWN 'Automatic Bill Payment'

Regular, even payments (such as installment loans) can be automated quite easily from a checking account. This 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 utilities company, for example) to charge the checking account for whatever amount is owed that particular month. If the vendor is not already familiar to the bank, the bank may ask the account holder to have the vendor pre-approved for this function. In most instances, however, it is the account holder who ultimately decides whether the automatic bill payment happens each month; he or she has the power to turn the automatic payment function off or to postpone the payment.

Automatic payments save consumers the hassle of having to schedule the same payment month after month, such as a car payment or utility bill payment. They can also help consumers avoid late payments due to forgetfulness. 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 exact 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 5th 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.

Automatic payments have a couple of potential downsides, however. If you forget about your scheduled automatic payments and don’t maintain a cushion in your checking account, an automatic payment could bounce. Not only will your bill remain unpaid, you might occur a returned payment fee from the company you were trying to pay, a late fee for missing the due date, and an insufficient funds or overdraft fee from your bank. Automatic payments aren’t infallible, either. 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 be difficult to cancel. Consumers might also forget about certain automatic payments and continue to pay for services that they no longer want. These “gray charges” might include magazine subscriptions, entertainment services or credit monitoring services.