No one likes paying bills, but at least gone are the days when you would sit at a table with a checkbook and stamps at the ready. Today, everything is electronic, and thank goodness for that. You can pay a vendor or a service electronically one of two ways – auto pay or bill pay. Even though they are similar in that they require only a credit or debit card and the Internet, let’s take a look at a couple of subtle – but important – differences between the two.
What is bill pay?
Bill pay is when you pay your bills through your bank account. You are the one initiating the payment, not a vendor. Think of it as your bank pushing the payment out to the vendor from your bank.
What is auto pay?
Auto pay is when a vendor has the authorization to debit your bank account. Think of it as the vendor pulling the payment out from your bank account. This is usually done by calling the vendor or going to their website, providing them with your bank info, and scheduling your payment, usually on a monthly basis.
There are advantages and disadvantages to both Auto Pay and Bill Pay
The advantages include:
- Decreased carbon footprint (no wasted paper!)
- Avoiding the cost associated with postage, envelopes, and checks (not to mention you save time writing and mailing those checks)
- A greater chance of limit or eliminate late fees because you’re not relying on the post office for delivery.
- Automating your payments. Many people view this as a “set it and forget it” option. It’s one less item on their to-do list.
The disadvantages include:
- An increased risk of overdrafting your bank account when you schedule a recurring payment
- Some vendors may charge a processing fee for using an electronic payment (more rare these days)
- Errors made by a bank or vendor can result in double payments or no payment (both are an unwanted hassle)
- You assume your bills have been paid if you set it and forget it.
Why We Recommend Bill Pay at First
When someone is getting organized, creating a plan, and gaining clarity of their expenses with our Plan Ahead Budgeting Method, we recommend bill pay over auto pay for one simple reason: You have more control. Bill pay gives you a greater awareness than auto pay on top of it being a simpler process. With bill pay (with most major banks):
- You can set up a payment as one-time or recurring.
- You can select your payment date.
- You can easily start and stop recurring payments.
- You login to one website (your bank) to pay multiple vendors.
- You do not give a vendor access to your bank account.
- You stay more engaged with your bills that fluctuate and are more likely to notice increases in your usage or vendor errors.
We have our clients create their budget based on their pay dates, as opposed to setting it up based on a 1st of the month cycle like most budgets. (Hint: That’s why most budgets fail.) Your payday should become designated as the day you manage your money. Your paycheck hits your bank account, you pull up your bank account online, and use bill pay to pay any bills due during that pay period. Voila, you’re done until your next pay period! It sounds almost too easy, right?
We do acknowledge that setting up bill pay might take a little longer than setting up auto pay on a vendor’s website. Sometimes if it’s a small local vendor, you might have to look up their mailing address so that your bank send a physical check for you, for instance. Also, if you have a bill that has a different amount due each payment, you will have to schedule the amount to pay that vendor yourself each month. There is not a “set it and forget it” option, as there would be with auto pay.
When and Why We Recommend Auto Pay
Bill pay is great when you’re first getting into the habit of budgeting and managing your money, but once you get a handle on things, auto pay may make more sense.
Auto pay can be a time-saver, but we only recommend using it once you are in a cash positive position. Since most of our clients are busy professionals and entrepreneurs, we want to streamline and build efficiencies for them, and auto pay can satisfy that purpose. For example, if your utility bills charge different amounts each month, auto pay will automatically debit the correct amount each month. (Hopefully – see Disadvantages of Auto Pay below.) Auto pay also should always debit your account or card on time each month, so you won’t ever have to worry about getting hit with a late fee.
Common Auto Pay Errors
It is worth noting a few common errors that can occur with auto pay. Since you do not have control of the payment date, you risk overdraft fees if you forget when payment is due and your checking account happens to be running low. That’s why we recommend picking only one or two pay dates on your calendar to help you keep track of things. Also, auto pay through multiple vendors means you have to remember all of the usernames and passwords as opposed to just your primary bank login. Don’t you already have enough passwords to remember?
You can add auto pay while staying on top of your finances expenses by following these best practices:
- Choose one or two due dates for all of your bills. Most vendors allow you to do this. It makes verifying that these bills have been paid so much easier.
- Choose one payment method for all your bills, if possible. It can be a credit card or checking account, but streamlining is the key to success. Try not to have multiple places where you have to search for expenses. (See our “A Word of Caution” note below on using debit cards for auto pay!)
- Get organized. Have a concrete, well-documented way to keep all of your username and passwords organized since you’ll need to remember the login for more than your bank account.
- Commit to staying present. The pitfall of auto pay is you can set it and forget it. Setting it is great; forgetting it, not so much. Put a reminder on your calendar every month to review expenses for any anomalies or potential errors.
One Big Disadvantage of Auto Pay
There is one other potential blunder of auto pay, and it’s a big one. When using auto pay, you are actually providing the vendor with your banking information. You may also be authorizing them to withdraw your money whenever they want, not just to pay your monthly bill.
What do we mean by that? Here’s a few situations some of our Fiscal Fitness clients (and even one of our coaches) have experienced with auto pay:
Scenario 1: The Vendor’s Error is Your Problem
“Julie” allowed Cox to auto debit her account each month for her bill. After moving, she returned all the required equipment and even kept the FedEx shipping confirmation as proof. However, Cox said they never received it, so they debited her account more than $600 for the cost of the equipment. And they could because she had given them access to her account a month prior. Have you ever read the “payment authorization” disclaimers you’re agreeing to? You give vendors authorization to debit your account not just that one time, but essentially whenever they like. It took months to get sorted out. Eventually, Julie received a refund from Cox, but the hassle would have been avoided had she not set up auto pay.
Scenario 2: Why You Can’t Set It and Forget It
“John” allowed his sewer company to auto debit his account each quarter for his sewer usage. He paid on average $100 every three months. One time, however, he received a bill for $5,400 which was simply an error. A big error. Had John taken a “set it and forget it” approach to his sewer bill auto pay, he would have had a massive, avoidable financial headache on his hands.
Scenario 3: When Your Vendor and Your Bank Fights
Coach Jaclyn (you know her) used auto pay for her cable bill (cable companies don’t do themselves any favors, do they?). One month, the cable company website and her bank website just stopped “talking” to each other. The payments used to process fine, and suddenly, they just stopped. Because she “set it and forget it”, three or four months went by before she even realized there was a problem. Suddenly, Coach Jaclyn had several months of a cable bill to pay on top of the hassle of removing several months of late fees.
Does this have you thinking twice about auto pay?
If you’ve already set up auto pay, canceling this service can be difficult. Vendors aren’t keen on giving up the control you’ve granted them. They prefer having access to your accounts because it’s easier for them. So before you set up auto pay, give some thought as to whether you can set up a bill pay method instead. You might save yourself some hassle down the road.
A Word of Caution: Auto Pay and Debit Cards
While we recommend (and use) both auto pay and bill pay for our own money management, we want to make you aware of two situations where tying a credit or debit card to an auto pay account can create more work than you might want:
- If the credit/debit card (or its number) becomes lost or stolen
- When the credit/debit card expires
When either of these two situations happens (because either one or the other WILL happen), you will need to change all of the accounts tied via auto pay to that card to reflect the new card’s information. Otherwise, you could get hit with late fees. Remember when we talked about usernames and passwords earlier? That’s why it’s important to be organized with them. If you have several accounts set up with that card, you’re going to have to change those accounts every time you get a new card number.
If you’re using your credit cards to earn points on utility payments and other auto pays, you need to change your info every time it happens. Same thing if your card expires and you’re issued a new one. But if you’re using a debit card to pay for your bills, an easy way to avoid this is to set up auto pay directly through your checking account instead. Your bank routing and account numbers will not change unless you open a new account at the bank, and sometimes you’ll even avoid processing fees associated with tying a debit card to your account.
So where does that leave you?
There are plenty of things to consider when choosing auto pay vs bill pay. Each way has advantages and disadvantages, but it’s really important to remember that no matter which option you choose, there is no setting it and forgetting it. You cannot check out of managing your money. The point of auto pay and bill pay is to make managing your money easier, so pick which one makes sense for you, set up a system, and work your way to financial bliss, one bill payment at a time.
What has been your experience with auto pay or bill pay? Are you Team Auto Pay or Team Bill Pay? Let us know in the comments if you had an experience – good or bad – with auto pay or bill pay.
Do you struggle with a system for paying your bills? We provide clients a detailed plan of managing their money. That means helping you figure out who pays what, when they pay it, and how they pay it, making bill-paying a breeze. If you want a detailed play for your money that takes into account your day-to-day spending as well as your long term goals, schedule a 15 minute Q&A call with one of our coaches today or read more about our one-on-one financial coaching services here.