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Are Automatic Payments an Answer to Money Management Woes?

Are Automatic Payments an Answer to Money Management Woes?

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."

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.

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.

Be careful

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.

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Anonymous   |     |   Comment #1
I have been using auto pay for over a decade for utility, internet and telephone bills. Never had a problem. In the event of cancelling a service the providers have stopped the billing process in every instance. I'm a frequent traveler and don't have to worry about timely payments. For credit card billing I just go online and pay the outstanding balance directly out of my checking account.
Anonymous   |     |   Comment #3
We have done the same.  Never had a single problem.  Not to say it won't  happen.  However, auto pay is not a set and forget convenience.  We always check our monthly statements, whether hard copy or e-statements,  for  correct accounting.  And as an added caution, sometimes go on-line between billing cycles just to check. 
Anonymous   |     |   Comment #2
It's fine to do auto pay through your bank or credit union's online banking, but don't sign up for auto payment through Verizon or your phone provider or direct through another utility. Years ago, before the internet. I did this with my phone service. Then I was charged a small fee for connecting me and it took me months and months to get my small fee returned. I must have spoken to at least 6-7 different people. Finally got one with brains, who actually got me my refund. I then stopped the auto payment. Took awhile for it to be taken off, but I told myself, never again. If there is a problem, good luck getting them to return the fee.
Anonymous   |     |   Comment #4
Just be sure you do not auto pay insurance premiums.  Once you switch to a different provider, it is impossible to contact the previous provider to cancel the autopay and they will continue automatically withdraw the premiums.  If you ever contact them, then it becomes an issue on when they will repay you for the overdrawn amount.
Anonymous   |     |   Comment #5
Also, keep current the expiration dates when new credit cards are issued on auto pay accounts else the auto payment may not go through as expected.
Anonymous   |     |   Comment #7
I never had that problem.  Of course, I only have one credit card and that is issued through the C.U. of which I have my auto pay set up.
Anonymous   |     |   Comment #6
I thought I was avoiding auto pay problems by using bill pay which means I have to enter the amount for the bank to pay.  It seems like if I pay a smaller firm, the bank sends out a check and debits my account immediately.

However, the bank can make a mistake, or the check gets lost in the mail, and if I don't know it yet the bank has already debited my account but the bill is never paid.

The bank should be responsible for making sure the check is cashed, but they do not.
Anonymous   |     |   Comment #8
I use auto pay, except I auto pay thru my CC company.

 When I get the CC bill I payoff the balance before It can accrue interest.

Warning: Only use this method if you can payoff the balance monthly.