What is Automatic Bill Payment?

Automatic bill payment eliminates the need to sit down and write a check or to get online and transfer funds. People enrolled in automatic bill payment programs do not have to do anything to pay their bills. Instead, an automated system does the work for them. Although these arrangements can be convenient, there are some things a person may want to consider.

An automatic bill payment system can work in at least two ways. Some systems are designed so that the party owed is able to deduct the amount he needs from the accounts of the people who owe him. Generally, this is done at specified regular periods. For example, a rental agency may deduct money to cover the rent on the first day of every month.

There are a wide range of bills that can be paid in this manner, such as telephone bills, bank loans, and car payments. The system can even work for bills that may not occur monthly, such as quarterly insurance payments or annual subscription renewals. A person can use numerous financial resources such as credit cards, checking accounts, or online money accounts to facilitate this process.

An automatic bill payment system can also be initiated by the person who must pay. Online personal finance tools allow a person to make pre-arranged payment orders. She can do this by choosing the amount, the day of the month, and the frequency she would like to pay. She will also need the details for the recipient’s account. Thereafter, funds should be transferred as she has arranged without further intervention from her.

For some people, such as those who travel or those who manage small businesses, this type of convenience is very helpful. It can also be a helpful tool for people looking for methods to organize their finances. By having all of her bills deducted from one source, such as a credit card, a person can easily assess her monthly expenses.

Automatic bill payment does require at least one thing from a person — having available funds. These systems may not be suitable for people who maintain low balances in their accounts or those who have unreliable sources of income. Consider, for example, the differing circumstances between a soldier and a freelance photographer.

The soldier will generally have set amounts paid to him at set times. The freelance photographer, however, may receive full or partial payments, at the convenience of her clients. Since the amounts and dates she will receive money are not set, she may want to avoid automatic bill payment to avoid the risk of overdraft fees.

In such instances, it is often possible to have arrangements that pull needed funds from alternative accounts. Many financial professionals advise against such arrangements because they often lead to reduction of savings and unnecessarily high credit card balances. Automatic bill payment arrangements can also decrease the likelihood of discovering billing errors. This is because when bills are automatically paid, many people fail to review their billing statements.