Why You Should Handle Automated Payments With Kid Gloves

By Debbie Dragon   

Most creditors allow people to pay their bills automatically by using an online account system. When creditors lack an automated payment program, you can still pay your bills automatically by using your checking account's bill-paying feature. The benefits of automatic bill payments are many, but there are also potential disadvantages. You should be aware of both the pros and cons of automated bill-paying programs before signing up.

The advantages of automated payments

For those who don't always make payments on time, setting up an automatic payment plan can ensure you'll no longer be hit with late fees. In theory, an automatic payment plan allows you to "set it and forget it." Disorganized or forgetful consumers can relax, knowing their bills will be paid without the tedious task of writing out checks and getting them in the mail in a timely manner.

By preventing accidental late payments, automatic payment plans can preserve and even improve your credit score over time.

Automated payment programs also save you the cost of postage stamps. U.S. postal rates are steadily rising, so this could result in substantial savings over a year or longer.

The disadvantages of automated payments

While many consumers consider automated payment programs an indispensable part of their household money management routine, there are certain situations when automated payments may cause more problems than they're worth.

• Fluctuating income. Self-employed individuals, those who work irregular hours and those who work on commission may find it hard to schedule payments around a sporadic payday schedule. If your automated payments are scheduled to occur on a specific day each month but your income is paid irregularly throughout the month, you may run short of funds in your account to cover your automated payments.
  
  Most banks will cover the overdrawn amount, but they'll charge you a fee in the process. So while an automated payment plan may help you avoid creditors' late fees, you could end up being charged bank overdraft fees that are equally burdensome.
  
• Moving due dates. Some creditors' due dates may not remain constant from month to month. Credit card account due dates in particular may fluctuate from month to month, based on the number of days in the billing cycle. If you schedule your payments for the 5th of each month, you may find that in some months the due date moves to the 4th. Suddenly, your automated payment is late.
• Paid-in-full accounts. Remember, using an automated payment system doesn't guarantee you'll eliminate every problem. If you aren't paying close attention, you might discover an account you had paid in full is still being charged automatically for several months after it's been paid off, or that your payment isn't being applied to your account before the due date. Don't let a "set it and forget it" mentality cause costly mistakes you would otherwise have noticed if you were paying your bills yourself each month.
• Cancelled accounts. Another potential problem with automated payments can occur if you decide to change or terminate the automated payments. If you want to change banks, for example, you'll need to first ensure that all automated payments are stopped before transferring your funds to the new bank and closing your old account — otherwise, you'll end up with a financial mess that cost you both time and money to correct.

The bottom line

Automated payment programs can be a boon for those who lack the time, interest or ability to manage their financial paperwork and household on a tight ship. If you're considering signing up or are already using them, make sure you're aware of potential pitfalls.