Pros and cons of automated payments from your checking account

Using automatic payments for routine bills can be a great convenience. Even so, before you set up automatic bank payments, there are risks you should know about. Setting up recurring checking account payments the right way can make your life easier while still keeping you in firm control of your finances.

Like most people, you probably have bills that you pay month after month. Whether you still write checks or arrange payments online, the repetition of doing the same task month after month can be tiresome. Plus, there’s always the chance you might miss a payment.

Automatic payments can reduce the chance of missing a payment deadline while also taking a little drudgery out of your life. This article will explain how to use automatic bank payments effectively.

What are automatic payments from a checking account?

Automatic payments work by allowing a company to take money from your checking account to pay bills that you owe. Once you set up automatic payments, the company can routinely contact your bank to draw money out of your account to pay your bills without you having to do anything.

A related form of payment is known as recurring bill pay. With automatic payments, you give your banking information to a company, and they draw on your bank to pay bills you owe to that company. Recurring bill pay features offered by some banks involve giving your bank the billing information and having them initiate payments to the company.

Either way, these payments are usually made through the Automated Clearing House (ACH) system. ACH transactions are electronic transfers between banks and credit unions. They allow money to be transferred quickly and efficiently between those institutions. There may be a fee for ACH debits from your account, so you should check with your bank to see if they charge for these types of payments.

How automatic payments from a bank account work

Not all companies give you the option of making automatic payments. If you’re working with one that does, you would provide them with the routing number of your bank and your checking account number. Along with this, you would authorize them to draw bill payments from your account.

Once automatic payments are set up, when a bill comes due, the company will contact the bank to initiate a transfer of money. Most likely, this transfer would occur through the ACH system. Because you would have previously authorized these payments, they occur electronically between your bank and the biller’s bank without any further involvement from you. You might not even receive notification of the payment until after it occurs.

While these payments are processed automatically, that doesn’t mean they require no effort on your part. Drawing payments from your bank account depends on you having enough money in the account to cover those payments. If you don’t, you could miss payments. That could result in late fees, loss of service, and eventual credit score damage if late payments persist. If you have overdraft protection through your bank, they might cover the bill payment but could charge you an overdraft fee.

It’s also important to keep close track of automatic payments in your account. Since they can change your account balance without warning, that could affect your ability to make other payments.

Pros and cons of automatic payments from checking

There are both benefits and drawbacks to using automatic payments. Being aware of them will help you decide whether the benefits are worthwhile to you. It can also help you manage the process to minimize the drawbacks.

Benefits of automatic payments

Here are some ways you might benefit from setting up automated payments:

• Convenience. Whether you still use checks or direct bill payments online, there’s some manual work involved. Spread across multiple bills every month; the time it takes to make recurring checking account payments adds up. Rather than having to find time for this repetitive task, automating it can buy you some extra time month after month.
  
• Reduced risk of missed payments. Paying bills manually carries a greater risk of missing a deadline. Whether you’re unable to always find the time to pay your bills before they’re due, or you simply forget one, late or missed payments have consequences. Those consequences can be avoided with automatic payments.
  
• Timeliness. Most bills give you a grace period between when they’re issued and when they’re due, but those periods can elapse before you realize it. If you’re traveling or simply busy with work and family responsibilities, you can’t always get around to paying the bills before it’s too late. Automatic payments can be set up to occur on time every time.
  

Potential drawbacks of automatic payments

You should weigh the potential benefits described above against these possible drawbacks:

• Overdraft risk. Automatic payments can heighten the risk of overdrafts in your accounts. A payment may be triggered just before your paycheck hits, leaving you a little short. You may try to make other payments before you’ve added the latest automatic payments to your records. Variable payments, like utility and credit card bills, can leave a larger hole in your account than you expected.
  
• Less awareness of vendor costs. Paying bills manually can keep you more aware of what you’re paying for. Whether it’s a matter of catching a billing error, or a rate increase or continuing to pay for a subscription you’ve been meaning to cancel, automatic payments can leave you a little less informed of where your money is going.
  
• Less control over payment timing. If you’re living paycheck to paycheck, the timing of bill payments can be a sensitive thing. Making sure a payment doesn’t occur before the next paycheck hits, or that you don’t pay too many bills at once, sometimes requires being flexible about when payments occur. Automatic payments take away some of that flexibility.
  

Risks to watch when using automatic checking payments

To use automatic payments successfully, it’s important to watch out for these risks:

• Not having a sufficient balance when payments occur. When you pay bills manually, you’re better able to check your balance and allow for other payments before you pay a bill. Automatic payments diminish this opportunity.
  
• Unexpectedly large payments. Who hasn’t been shocked by an unexpectedly large credit card or utility bill from time to time? Having these large amounts paid automatically can increase your risk of overdrafts.
  
• Delayed ability to catch payment errors. Whether it’s an incorrect amount on your bill or charges that have already been paid, paying bills automatically may not allow you to catch these errors before the money goes out of your account.
  
• Less ability to coordinate the timing of payments with income. Billing cycles don’t always line up with the timing of your paychecks. When you pay manually, you can manage this by delaying payments by a few days when necessary. With automatic payments, it’s harder to prevent a payment from going out a few days before payday.
  

How to set up, track or stop automatic bank payments

Here are some tips for getting the benefits of automatic bank payments while managing the risks involved:

Leave more of a cushion in your balance

Keeping a low balance in your account increases your risk of overdrafts and other payment problems. In the long run, maintaining a slightly larger balance may cost you much less than late fees and overdrafts.

Coordinate the timing of payments

When you set up automated payments, try to get them on a schedule that suits your needs. If possible, coordinate the timing of payments with when you get paid. Try to avoid having multiple payments hit all at once.

Track your account closely

Use digital tools to keep a close eye on your account balance and transactions. This will help ensure you’re aware of when payments have come out of your account and how much of a cushion you have left.

Anticipate payments

Be aware that when you check your balance, there may be payments scheduled to come out of the account within the next few days. So, keep a calendar of the recurring checking account payments you’ve set up so you can see in advance when they’re going to happen. That way you can avoid conflicts with other payments you make from the account.

Use automatic payments primarily for uniform payments

Automatic payments work best with payments that are for the same amount every month. If the payments are variable, that makes it harder to keep track of your balance. If you do pay variable bills automatically, make sure you have a good system for checking the amount of those payments as they occur so you can record them in your records.

Use budget billing plans for variable bills

A good way to deal with variable payments is a budget billing plan. These are often available for utility bills, which change from month to month and can have large seasonal fluctuations. These plans smooth out payments based on the average of your past bills. Just be aware that you might occasionally have to pay a larger bill to make up for any difference between the estimate and your actual usage.

Cancel automatic payments promptly and keep a record

If you want to discontinue a service or for any other reason want to stop making automatic payments, you have the right to revoke your authorization. You can also give your bank or credit union a stop-payment order at least three business days before a scheduled payment. If you give the stop-payment order orally, your financial institution may require you to confirm it in writing within 14 days.

Keep written records

Be sure to document any authorizations you’ve given for automated payments. If you cancel payments, keep written records of those instructions.

Only set up automatic payments with trusted companies

Authorizing a company to take these payments involves giving them your banking information. Only do that when you’re confident you can trust the company and its employees.

Use stop-payment orders when necessary

If you want to stop automatic payments, the surest way is to notify both the biller and your bank. You can request a stop-payment order from your bank to block payments even if the biller continues to request them. Be aware that stopping payments does not get you off the hook legally for amounts owed.

These tips can help you use automatic payments efficiently. That could help you cover your financial responsibilities while leaving you more time for other priorities.

Frequently asked questions

Are automatic payments from a checking account the same as online bill pay?

Not quite. Online payments are manually initiated by you through your account website or app. Automated payments typically involve authorizing a company to withdraw recurring payments directly from your account.

Can I stop automatic payments from my bank accounts?

You can stop automatic payments by notifying the bank or credit union at least three business days in advance. You can notify your financial institution orally, but it may require written confirmation within 14 days. Notifying both the biller and the bank is the surest approach.

Can automatic bank payments cause overdraft fees?

Yes. If you don’t have enough funds in your account when an automatic payment is scheduled, one of two things may happen. One is that the payment may fail, putting you at risk of late fees and loss of service. On the other hand, if you have overdraft protection from your bank or credit union, that institution may cover the payment, but they may charge you an overdraft fee.

Should I use automatic payments for every bill?

Automatic payments are best suited to regular payments that are the same amount every month. If you want to try automatic payments, it might be best to start with bills like that to get used to tracking these payments and keeping enough money in your account. Then, if that goes well, you might consider also using automatic payments for variable bill amounts.