Dear New Frugal You,
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Is it wise to pay a recurring (monthly automatic withdrawal) with my credit card?
Good question! And, it probably depends on what you mean by wise. There are some distinct advantages to having bills paid automatically. But there are also some concerns you need to be aware of.
The shift away from paper bill paying has been significant in the past 10 years. Most utilities and banks love it. For one thing it reduces paperwork, data entry and human errors. That makes it cheaper for them.
It's also more predictable. For recurring bills (such as your utilities) you're much less likely to be late or miss a payment if it happens automatically. For subscription services the renewal rate is higher. Those are pluses for a business -- so much so that some companies offer a discount if you pay automatically or charge you if you want a paper bill and pay by check.
So it's clear why businesses like automatic payments, but let's take a look at what's in it for you.
There are a number of things to like about automatic payments:
- Saves time. Nobody likes to spend time writing checks and filing statements. Automatic bill paying eliminates that chore.
- Reduces paperwork and filing. With paper bills and checks you need to keep a copy of the bill. If you're an organization freak you might even have a two-drawer file cabinet with bills filed neatly in manila folders. All that goes away with automatic payments. If you need to check your account you simply go online.
- Saves postage. The U.S. Postal Service won't like you, but every time you pay a bill automatically you save the cost of a first-class stamp. True, it's only a few cents, but they do add up over time.
- Less clutter. Your desk won't be covered with bills waiting to be paid. You'll be able to concentrate on the mail that really needs your attention.
- You can't forget to pay your bill. You might have been sick or on vacation. Or just forgot. Or maybe the bill gets lost in the mail. It happens. But most people who write checks sooner or later manage to miss a payment. The computers that pay your bill automatically never sleep, get sick or take holidays.
- Avoids late payment penalties and fees. Because you're never late you avoid late payment penalties and fees. You'll also avoid the hit to your credit score.
- Predictable finances. With paper bills you never know exactly when a check will clear your bank and be charged to your account. With automatic payment you'll know. That might not be important if you carry a sizeable balance in your account, but could be critical if you run low.
- More convenient. The bottom line is that automatic bill payments are more convenient. They do make life a little less complicated for you.
But, there are some drawbacks to automatic bill paying that you need to consider:
- Require effort to stop. Once you set up automatic payments they happen, well, automatically. So you'll need to take action to stop them. That means time and effort on your part.
- Companies make it hard to stop. Knowing that you've given them authority to regularly charge your account makes some companies unwilling to let you off the hook. Some make it hard to find or follow the instructions to stop automatic payments. You're likely to find that signing up for automatic payments is a 24/7 feature, but getting rid of them is available on banker's hours.
- Easy to forget. Out of sight, out of mind. Unless you review your bank statement each month it's easy to forget that money is going out of your account on a regular basis. Paper bills are reminders that you're spending money.
- You could spend money needlessly. You may have stopped using Netflix streaming months ago. But if you don't take action to stop the automatic payments you'll continue to pay for it each month. With a paper bill it's easier to write a note to cancel service and return it in the envelope provided.
- It's a hassle if accounts change. If you change credit cards or account numbers you'll need to let them know. Otherwise they'll try to charge an expired card and fail. You could face a late fee or other penalty.
- You could still miss payments. While they're more reliable than human bill-payers, electronic systems suffer failures, too. Setting up automatic bill payments don't relieve you of the need to review your bank statements to make sure bills have been paid. If there's a failure, something else will be imposed automatically: late fees, and you'll have to take the initiative to get them reversed.
So what should you do? You might decide that you'd like to begin using automatic payments. Begin slowly. Take a predictable bill, like the Netflix bill we mentioned, and start with that one. After a few months when you get comfortable add a few other bills that stay the same each month.
Finally you can decide whether you want to include things that change such as your electric bill (assuming you don't use a level payment plan).
You'll still need to check your monthly bills. What you've been charged each month could change suddenly.
So is it wise to use automatic bill payments? Yes, it probably is, but you'll still need to pay attention to your finances even if you're not writing checks each month.