Automatic Bill Payment

AAA

DEFINITION of '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. Installment Debt

    A loan that is repaid by the borrower in regular installments. ...
  3. Advance Payment

    Any type of payment that is made ahead of its normal schedule, ...
  4. Online Banking

    The performance of banking activities via the Internet. Online ...
  5. Checking Account

    A transactional deposit account held at a financial institution ...
  6. Brokerage Account

    An arrangement between an investor and a licensed brokerage firm ...
Related Articles
  1. Credit & Loans

    3 Credit Card Benefits You’re Paying For But Not Using

    Unnecessary expenses are easy to eliminate once you look at your spending, but not all expenses are obvious, especially when it comes to credit cards.
  2. Credit & Loans

    Saving Money Or Paying Off Debt?

    When choosing between blasting through debt and establishing precautionary funds in case of an emergency, the right course of action is rarely self-evident
  3. Savings

    5 Banking Fees That Are Actually Worth Paying

    In finances, "fee" is a like a three-letter bad word, the opposite of what personal finance is supposed to be, saving money and not being penalized for it.
  4. Budgeting

    Negotiating A Debt Settlement

    If you're being harassed by a debt-collection agency, you can take charge. Find out how.
  5. Entrepreneurship

    Small Business: Speed Up Receivables To Avoid A Cash Crunch

    Waiting for customers to pay can be a losing game. Look to factoring for quicker cash.
  6. Credit & Loans

    A Guide To Debt Settlement

    Find out how you can negotiate your way to a lower debt load by paying up front.
  7. Insurance

    Your First Checking Account

    This owner's manual will show you what to expect from your bank.
  8. Options & Futures

    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.
  9. Personal Finance

    Procrastinator's Guide To Bill Payment

    Avoid punishing late fees and keep your credit score intact with these 10 tips.
  10. Economics

    Understanding Retail Banking

    Retail banking refers to the mass-marketed, consumer-oriented products and services offered by the local branch of the commercial bank.
RELATED FAQS
  1. What is the difference between a Debit Order and a Standard Order in a bank reconciliation?

    While both debit orders and standard orders represent recurring transactions that must be considered in bank reconciliations, ... Read Full Answer >>
  2. How can I cancel a bank draft that I have purchased?

    It is not commonly possible to cancel or stop payment on a bank draft since it, in effect, represents a transaction that ... Read Full Answer >>
  3. How does investment banking differ from commercial banking?

    Investment banking and commercial banking are two primary segments of the banking industry. Investment banks facilitate the ... Read Full Answer >>
  4. Who generally structures a syndicated loan?

    Typically, either an investment bank or a commercial bank structures a syndicated loan. A syndicated loan is provided by ... Read Full Answer >>
  5. What role does a correspondent bank play in an international transaction?

    A correspondent bank is most typically used in international buy, sell or money transfer transactions to facilitate foreign ... Read Full Answer >>
  6. What are the typical repayment terms for a syndicated loan?

    The typical repayment terms for a syndicated loan are periods of three to six years for short-term loans or seven to 10 years ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Recession

    A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, ...
  2. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  3. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  4. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  5. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  6. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!