Automatic bill payment definition
/What is Automatic Bill Payment?
An automatic bill payment is a scheduled payment from a bank account to settle a recurring payable. These types of payments are routinely made for payments that recur over long periods of time, such as mortgage payments and car loans. The payments are typically extracted from a bank account, but may also come from a mutual fund account or brokerage account.
Automatic bill payments are usually set up through the mutual participation of the buyer and seller, where the seller requires the buyer to fill out an automatic ACH debit payment form. It is also possible that a buyer will set up a supplier’s invoices to be automatically paid through an automated bill paying service.
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How Automatic Bill Payment Works
To set up automatic bill payment, you have to notify the bank of the amount to be paid, how frequently it is to be paid, the source account, and the target account. The account holder normally sets up this information through an online portal operated by the account holder’s bank. Alternatively, the seller may set this up with the bank, noting the buyer’s bank account from which the payment will be extracted. In either case, the full amount due is usually paid.
Advantages of Automatic Bill Payment
There are several advantages to automatic bill payments, which are as follows:
Avoids late payments. Making automated payments eliminates the risk of making late payments. This is typically sold by vendors as being the central advantage of automated bill payment.
Reduces work. Automation eliminates manual bill paying, which might otherwise be a significant chore, especially when there are many bills to be paid on a recurring basis.
Increases your credit score. Having a history of ongoing timely bill payments will likely result in a higher credit score for the buyer.
Disadvantages of Automatic Bill Payment
There are several disadvantages to automatic bill payments. First, the risk of fraud increases, since you are less likely to monitor the outgoing payments. Second, one of these scheduled payments may be for more cash than is currently in the account, which would result in a rejected payment, and possibly a late fee and returned payment fee. And third, it can be difficult to cancel these arrangements.
Example of an Automatic Bill Payment
Harry has a $2,500 monthly mortgage payment on a home mortgage that will run for the next 30 years. Rather than having to remember to cut a check to the lender for a large part of the rest of his life, Harry decides to set up an automatic bill payment, where the $2,500 is automatically shifted from his bank account to that of his lender. He schedules the payment to occur three days before the actual monthly payment due date, so that the payment will never be late.
Automatic Bill Payment Best Practices
There are several best practices associated with the use of automatic bill payments. First, always be sure to carry forward these bill paying arrangements whenever you shut down a bank account and move to another one. Second, review actual payouts under these arrangements at regular intervals, to ensure that they are working as expected. And third, inspect the payees and amounts paid to ensure that there are no fraudulent transfers occurring. Finally, review all automated payments to make sure that you still need the services for which you are paying; you might no longer need some of them.