Budget set up? Check.
Consolidated loans? Check
Created debt payoff list? Check
Next question….. what method should I use to payoff my debt?…… let’s investigate
There are 2 popular ways to pay off debt, auto pay and bill pay.
Auto Pay
Does paying bills feel tedious and time consuming? There are things that can be done to make it easier namely by setting up automated payments.
Putting recurring payments on autopilot makes paying bills less of a headache and frees up time so that a person can focus on managing other aspects of their financial life.
Auto payments is automatically sending payments to billing companies from a bank account or credit card account. It is a “pull” method of taking money from your accounts to pay bills. The amount due is collected automatically by the biller according to the payment schedule. Simple, straight forward, and done automatically for you. In other words, it’s “set it and forget it”.
As my girls would say, “it’s easy peezy”! 😊
Automated payments can be used for paying a variety of bills:
– Mortgage Payments
– Credit Cards
– Streaming Services
– Utility Bills
– Student loan payments
– and much more!
There are 2 main ways to setup automatic bill payments.
The 1st way is to make payments using an automated clearing house (ACH). This is how electronic funds transfers occur from bank accounts. The main way to paying bills is having the biller pull money from the bank account.
If chosen to pay directly to the biller, account information is given to the biller and you grant access to the biller to pull the money directly out of your account each month on a specified date.
The second way to setup automated payments is by using your credit card. Automated payments can be setup using a credit card to pay for the fees.
To establish automatic payments with a credit card, the biller is given the credit card information including the card name, card number, expiration date, and CVV. The biller then processes the charge against the credit card for the amount due each month. Instead of making a payment to the biller, a payment to the credit card company is made toward the outstanding balance.
I am going to let you know right now, I am NOT an advocate for using auto pay in this way. A high-interest debt is being used to payoff another debt. You’re literally “Robbing Peter to Pay Paul”.
My philosophy is to never use a credit card to pay bills UNLESS the bill is paid off each month religiously. If not, those monthly bills end up costing a lot more since there is now a high interest rate attached to those bills.
I wanted to point this out as a possible option because it is an option although not a good one.
Bill Pay
Bill payments is when bills are paid through a bank account. It is a “push” method since you are the one initiating the payment, not the biller or vendor.
Automated payments can be used for paying a variety of bills:
– Mortgage Payments
– Credit Cards
– Streaming Services
– Utility Bills
– Student loan payments
– and much more!
When bill payment using a bank account is setup, the bank is told how much to pay and when to pay each month. The bank will authorize the amount to be deducted from selected account and transferred to the company that needs the payment.
The setup is easy. Log into the online bank or mobile banking app and tell the bank which biller to pay out of which account as well as how much and what day to pay each month. While not a “set it and forget it” option, it is a quick and easy way to pay bills.
Auto Pay – How It Benefits
Here are some of the benefits of using auto pay:
Convenience and simplicity
Auto pay is quick and easy to use. It only takes a few minutes to setup and then you’re done! It saves a lot of time each month from manually paying bills.
Once in the habit of auto paying bills, managing money can be become easier since you’ll know how much money is coming out of account and when.
Money Saver
Automated payments can save money. Ordering paper checks can be expensive. Late fees and penalties can accrue waiting for checks to arrive to the biller. This is because, billers count payment due date once the check reaches them NOT when the check was written and sent in the mail.
For example, the processing time for a check to pay off a credit card company can take 10-14 days. Auto payments would process the day the payment is made.
Improves Credit Score
Missing payments and accruing late fees can also damage your credit score. With auto pay, this doesn’t happen. Bottom line is auto pay can potentially improve your credit score over time since one of the biggest factors to a good credit score is timeliness of payments.
Auto Pay – When Not to Use it
While auto pay may seem like the ideal solution, it is not necessarily good for every situation. Here are some examples when auto pay does not work in your favor.
Not Good for Variable Payments
Auto pay is great when making the same payment at the same time for each month (mortgage, car payment, etc.). Unfortunately, not all bills are setup that way. Credit card and utility payments can fluctuate depending upon usage.
If using auto pay for these types of bills, a person’s account could potentially become overdrawn. This results in overdraft charges if not keeping an eye on the bank balance.
Do Not Use For a Tight Budget
Auto paying bills could work well for someone who makes WAY more money than is spent. However, if you are like the majority of Americans who live paycheck-to-paycheck, then auto paying is probably not right for you.
Managing a tight budget with variable payments on bills could to lead to overdraft and late fees which leads to the next problem with auto paying bills………
Does Not Leave a Person Connected With Their Money
Having a “set it and forget it” system leads to a “set it and forget it” mindset. It can leave a person disconnected and out of touch with how their money is being spent.
Especially when starting out, this can lead to a lot of problems down the road.
Billers Sometime Make Mistakes That Are Hard to Correct
Let’s face it. Billers are run by people and people are human. Mistakes can be made. While these mistakes weren’t made by you, unfortunately, you are the one left holding the bag and having to clean up the mess.
Auto paying bills does not make it easy to correct someone else’s mistakes because you have given that company carte’ blanche’ to take money out of your account literally whenever they feel like and for as long as they like. Companies are not very willing to admit their mistakes much less correct them.
These problems can be corrected but sometimes takes an act of God to do so. I know. Been there and done that. This can lead to a lot of painful headaches and can eat up valuable time for you.
Bill Pay – When Is It Right for Me?
Here are some of the benefits for using bill pay:
Keeps you connected with your money – somewhat
Bill pay can be set up to be done both automatically pushing payments to billers or can be done manually. Both have its pro’s and con’s. Paying the bills manually can leave you more connected to your money and how it is being used.
Also, there are many bill pay services that allow customization. It can be setup for viewing payment history, receiving eBills, and keeping track of when bills are paid.
More Control Over Your Money
Bill pay allows the ability to organize bills and keep track of due dates. It also makes it easier to see where your money is going and ensure enough funds area available to cover bill payments.
Online bill paying also automatically provides a receipt or record of the transaction. It’s helpful if you cannot remember whether a certain bill was paid on time or if proof is needed that a bill was paid.
Allows bill payment through one site only
Bill pay is a convenient service offered by banks and credit unions. It allows all your recurring bills to be organized and managed in one place. With auto pay, several different sites must be setup and managed. It is a lot of upfront work. With bill pay, it is done though one site only.
Instead of paying the mortgage on one site, the credit card on another, and car payment on a 3rd site, it is all managed though 1 site. Easy and simple. 😊
Bill Pay – When It Doesn’t Work For You
Here are some pitfalls to look out for when determining if bill pay is right for you:
Processing Time
Bill pay is slower to process that auto pay. Auto pay can be literally instantaneous. Bill pay, while giving you more control of your money, is slower. It can anywhere between 2-7 days to process a transaction. Keep this in mind when deciding which bills may be candidates for online bill pay.
Potential Security Concerns
Some people may have concerns about bill paying online through their bank. Hacking is becoming more and more prevalent. In fact, both my wife and I were victims of identity fraud a few years ago. Luckily, we were not responsible for paying back what debt the thieves racked up. We were lucky.
However, more complex passwords and multifactor authentication are becoming more prevalent for securing personal information. While the possibility of hacking exists, it has become safer than years past.
Regardless, it is wise to regularly monitor account activity for any unauthorized charges.
Potential Bank Errors
The potential exists for banks to make errors which could result in double payments, late payments, or no payment made. Ensure to regularly monitor account activity. It is always better to correct these discretions sooner rather than later.
What To Do If Starting Out
If just getting started, I recommend using online bill pay. While getting organized, creating a plan, and getting clarity on all the expenses a person has, online bill pay has 1 major advantage over auto pay: more control. Bill pay gives you greater awareness than auto pay and leads to the development of good financial habits. Let’s face it, when getting started, having a plan and developing good habits are key to achieving financial success.
Bill pay allows:
- Setting up one – time or recurring payments.
- Selection of payment dates.
- Ability to manually pay bills online. Good for variable payment bills.
- Ability to log into 1 site (your bank) to pay multiple billers.
- Inability to give biller direct access to personal bank accounts.
- Higher likelihood of staying engaged with money and the overall process.
What I Did
From a previous article, I talked about the hybrid approach my wife and I use that works for us. The key to remember is that this is not an “either / or” proposition. Both have merits and have a good use given the right situation. Keep an open mind, be flexible, and focus on the outcome wanted. Then develop a process that will both make you successful and achieve the desired results.
Live the Life You Love, Want, and Deserve! 😊