Automatic payments can be a painless way to pay your bills. You authorize a company to take what you owe them out of your bank, credit union or other financial services provider at a specified time. It’s convenient. It’s also surprisingly a little more complicated than you might think.
"People forget that creditors can keep charging you. I learned this the hard way," says John Rampton, founder and CEO of Due.com, a provider of invoicing systems. "This can be a nightmare when like myself, I left a company and had my credit involved. When I left, the charges kept coming. I called them up and they said they had to have a new credit source or they wouldn’t remove it. Know what you’re getting into."
The Consumer Financial Protection Bureau is hearing many tales of people having a hard time stopping automatic payments and is getting the word out to consumers that they have rights when it comes to debit payments.
Financial expert Andrea Woroch says she doesn’t do automatic payments unless there’s some savings benefit. What’s her issue? "Automated payments can make you lazy. You don’t check the bill to ensure accuracy in charges. It’s crucial to check your statements monthly to ensure you aren’t being overcharged, to look out for potential fraudulent charges, and to stay on top of price increases."
While automatic payments have several pluses, increasing your credit score, reducing late fees, and possibly getting a discount, says Harrine Freeman, CEO of H.E. Freeman Enterprises, there are plenty of downsides.
What you need to know
"The payment has to be set prior to the due date because it takes time for the bank to process the payment. You may be charge a fee for the service. You may be disqualified for card rewards," says Freeman.
The troubles don’t end there. "It’s easy to overspend and not realize how much you’re spending until a bill comes, but if you’re using autopay you may even ignore the bill, which exacerbates the problem," says Liran Amrany, founder of Debitize.
You then run the risk of not having enough funds in your account to cover your payments, which means overdraft fees, and if your payment doesn’t go through, you’ll owe your creditor a late fee, unless you have overdraft protection.
However, with a bit of strategy you can make auto-pay work as a money management tool.
It’s one thing if you’re setting up auto-pay with the utility company you’ve been doing business with for years, but verify companies that are you are just getting started with. Be sure they are credible. The CFPB advises using a different payment method until you’re sure you’re happy with the company or service. Never give your bank account or debit card information to a company that you’re even a bit unsure about.
"Consider using balance threshold alerts which will let you know anytime your automated bill account balance falls below a pre-set threshold," advises Matthew Lehman, who manages digital banking for KeyBank.
Be clear about the terms of your agreement. The terms should be understandable. Review the copy of your authorization and keep it for your records. Know how much money and how often money will be taken from your account. Watch your account to see if what you agreed to is happening.
Familiarize yourself with the rules
According to the CFPB, a company cannot require you to repay a loan by automatic debit from your checking account as a condition for giving you a loan (unless the loan is an overdraft line of credit). Be wary of a company that pressures you to repay by automatic debit.
Ask for a discount. Some utility and other companies will give you a discount for setting up automatic payments. Inquire with customer service about this before setting up auto-pay, advises Woroch.
No means no. "If you cancel a subscription or service, the company has to stop billing you," says Freeman.
If you decide you want to stop automatic payments, the CFPB says to call and write the company. Tell the company that you are taking away your permission for the company to take payments out of your bank account. This is what is called "revoking authorization." You also want to call and write your bank or credit union and tell them you have "revoked authorization" for the company to take automatic payments from your account.