When I pay my car insurance premium, the website wants to know if I would like to set up automatic payments. Same with credit cards, utilities and just about any other kind of payment you can make online. But although automatic payments can help keep your bills paid on time and avoid late fees, they should be used with caution – and how much they can help you depends on your situation.
So when is it a good idea to “set it and forget it,” and when is a more hands-on approach to bill payment in order?
When to Choose Auto-Pay – and for Which Bills
There are many reasons to set up at least some kinds of payments on an automatic payment system. Predictable payments such as insurance premiums, subscriptions and storage space rental all qualify for the auto-pay treatment. Also, phone or Internet bills are prime candidates for automatic payments, as are utility payments if you know about what your usage has been and can predict the amount of your bill.
It also makes a lot more sense to go with auto-pay if your income is direct-deposited at set, predictable times and can schedule your payments to come out soon after those deposits.
Auto-Pay for Credit Cards?
Some recommend that you should also set up your monthly credit card payment on auto-pay, because it helps you make your payments on time effortlessly, helps you avoid late fees, and keeps your credit score nice and high – the way you (and lenders) like it.
However, a credit card statement is different from a car insurance bill. Your credit statements should be reviewed each month both to make sure the balance isn’t getting too high and also to make sure there isn’t unwanted or unauthorized activity there.
If someone made unauthorized purchases using your credit card, you need to know that so you can alert the credit card company immediately. And you need to know what the balance is so you can work harder to bring it down, thus improving your credit score so it will be nice and high when you need to finance something else.
But if you know that you’re the type of person who can have automatic credit card payments set up and remember to also review the statement each month, that’s the best of both worlds.
Avoiding Potential Pitfalls of Automatic Payments
For some people, setting up any kind of automatic payments might prove hazardous to their checking account and credit rating. That includes those who have more unpredictable income because they are self-employed or freelance, and thus don’t get paid the same amounts on the same dates each month.
Also, anyone who is prone to making big purchases with the debit card and forgetting to subtract them from the check register – or forgetting to subtract automatic payments when they are due – is at risk of going into overdraft and incurring the dreaded NSF fees.
But you could still use auto-pay and avoid those risks if you:
- Subtract the amount of all automatic payments from your check register at the beginning of each month so they’re already accounted for
- Transfer enough money into a separate “bill pay” checking account and have each month’s automatic payments deducted from that account
- Keep a significant pad of money in your checking account in case you forget to subtract a purchase or a payment
The solution you use depends on your financial situation and the way you handle money. But if you find a way to use automatic payments for your credit card bills and still remember to review the statements, it’s a time-saver, a stress reducer, and a great way to keep your credit accounts current.