As a financial advisor, I handle many questions from my clients about investing their money, planning for the future, and protecting their finances. One of the things I am passionate about is helping them avoid the minor financial mistakes that can end up costing them big time over the long run.
Carrying credit card debt is one of these too-often overlooked mistakes, as interest can add up to big money. Another costly mistake is neglecting to pay bills on time. Those fees may not seem like much, but if you're paying them several times a year, you're letting money slip through your fingers!
Automated bill pay is one of the most commonly encouraged forms of bill payment by credit card and utility companies. It can help you avoid those late fees, but is it really the best move for you?
There's no doubt there are benefits. Setting up automatic payments for your bills means you're less likely to miss them. Your accounts also remain protected from late payment fees, which in turn protects your credit score and your bank account.
But what you may not know is that there are a number of “hidden” risks associated with automated bill payment. Before you sign up, know what pitfalls to avoid.
The Clear Advantage of Automated Bill Payment
U.S. News & World Report recently published an article discussing credit card payment statistics. According to the Seventh Annual Billing Household Survey by Fiserv, up to 36 percent of consumers paid their bills after the due date and of those 70 percent did so because they simply forgot! This is a clear indication of the benefits of automatic bill pay features. Paying your bills on time is critical to safeguarding your credit score and protecting your bottom line. When bills are paid automatically, these risks are fewer.
4 Potential Risks of Using Automated Bill Pay
In order to reap those benefits, though, you'll need to watch out for the risks associated with using this service. Some of these include the following:
- Don't just “set it and forget it.” There has to be money in your checking account ready to go out on the day your payment is scheduled. If you're at risk of having a low balance, overdraft charges and returned check fees add up quickly and override the benefits of paying on time. Only automate if you plan to have enough money to pay your bills in your account all of the time.
- Don't only pay the minimum payment. If you plan to use automatic bill pay on your credit cards, make sure you are paying more than the monthly minimum. That's a good start, but paying off your credit aggressively can save you thousands of dollars over the lifetime of those loans. If you can, set your automatic bill pay at a significantly higher level than the minimum payment to avoid paying more interest than you have to. Better yet, do a manual check in each month and pay off the balance of your debt.
- Don't forget to check your bill for errors. Complacency can be problematic, reports NerdWallet.com. If money is coming out of your account automatically, you may not remember to look over your bills to scan for errors. Billing mistakes can happen, and if you overlook an unnecessary fee or misplaced decimal point you could end up being charged $80 instead of $8. These errors can easily slip past you if you aren't reading your statements each month.
- Don't forget about your bills altogether. It may seem paradoxical, but the goal of automatic bill pay isn't to make your bills “out of sight and out of mind.” Think of it as a failsafe, not a replacement for your attention. Changing terms and fluctuating rates will impact your bills, and you want to stay informed and in the know so automated payments don't end up costing you money.
Your Bottom Line
With these tips in mind, who is the best candidate for automatic bill payment? If you plan to keep sufficient funds in your account and you are making fixed payments that don't change month-to-month, it really can be beneficial to you as a backup measure to protect your bank account and credit score. You still need to take the time to manage your finances month-to-month and let automatic bill pay guard you from making late payments. The goal is to avoid late payment fees and complications with your credit score, not to replace good old-fashioned household money management.
At Lindsey & Lindsey Wealth Management, we're committed to helping our clients make the most of their finances, from big picture strategies to the little details that add up in the long run. Always consult a financial professional before making decisions that may impact your finances. We're here to help!
How do you balance automated bill payments with hands-on knowledge of your finances? Tweet your strategies @Lindsey2Wealth!