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.

RELATED TERMS
  1. Returned Payment Fee

    A charge a credit card company may assess to a customer’s account ...
  2. Finality Of Payment

    Refers to the instant that a payment to another party is completed, ...
  3. Down Payment

    A type of payment made in cash during the onset of the purchase ...
  4. Stop Payment

    A request made to a financial institution to cancel a check or ...
  5. Amortization Schedule

    A complete schedule of periodic blended loan payments, showing ...
  6. Automatic Transfer Service - ATS

    A banking service offered to customers that has both a general ...
Related Articles
  1. Personal Finance

    Should You Pay Your Bills On Autopilot?

    Now that you can sign up to have your bills paid automatically online, it it a smart way to make your life more efficient? A look at the pros and cons.
  2. Investing

    Automating Your Bill Payments

    Automation can be a painless (and free) way to remove the stress of bill scheduling from your life - if you do it right.
  3. Personal Finance

    Procrastinator's Guide To Bill Payment

    Avoid punishing late fees and keep your credit score intact with these 10 tips.
  4. Personal Finance

    Is Making Biweekly Mortgage Payments A Good Idea?

    Some people believe making mortgage payments every two weeks, as opposed to once a month, can chop years off of a home loan. But is it really a good idea?
  5. Personal Finance

    When is a Down Payment Used?

    A down payment is an initial cash payment on an expensive good.
  6. Personal Finance

    Delayed Interest: Buy More, Pay Much More Later

    Find out the real cost of buying on a delayed interest plan.
  7. Personal Finance

    8 Steps To An Organized Financial Life

    Disorganization makes planning difficult, and that can cost you big time.
  8. Personal Finance

    Where Should I Keep My Down Payment Savings?

    While saving up for a down payment, where should you keep your money. A bank? The stock market? It all depends on your timeline.
  9. Personal Finance

    Mortgage Basics: The Amortization Schedule

    By Lisa SmithThe amortization schedule for a residential mortgage is a table that provides a breakdown of the schedule of payments from the loan's first required payment to the loan's final payment. ...
  10. Investing

    How To Break Up With Your Bank

    Whether you're moving or have just found a better no-fee plan, find out how to switch banks with ease.
RELATED FAQS
  1. How does online banking assist with budgeting?

    Setting up online banking can make a personal budget easier to manage through the use of multiple accounts or expense categories ... Read Answer >>
  2. How long do you think it will take to show to creditors that my account is in good ...

    My credit score is really low due poor payment history. ... Read Answer >>
  3. How soon do I need to start my application for Social Security retirement benefits?

    Understand when to apply for Social Security benefits and when you can expect to receive monthly payments based on age and ... Read Answer >>
  4. Is a deficit in the balance of payments a bad thing?

    Discover how it might be possible to run a balance of payments deficit, what that means in terms of international trade and ... Read Answer >>
  5. What are the advantages of paying your taxes with the Electronic Federal Tax Payment ...

    The Electronic Federal Tax Payment System (EFTPS) is a free tax payment service offered by the U.S. Department of the Treasury ... Read Answer >>
  6. Can you pay off a Walmart credit card in store? (WMT)

    Understand the various methods that consumers can pay off a Walmart credit card. Learn which options are the easiest and ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center