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Money, Personal Development

Are Automatic Bill Payments Keeping You in Debt Longer?

Automatic Bill Payment is Convenient, But Setting and Forgetting Can Cost You in the Long Run

You already know that getting out of debt requires paying attention to what you spend and reducing debt. The pandemic helped many people reduce overall debt by focusing on spending (or not spending) and using stimulus check to make payments on debt.

Yet debt continues to be a way of life. As of late 2020 the average American carried $92,727 in total debt and 95% of adults in the United States had a credit card open in their name. Credit card debt alone averaged $5313. In 2021, both auto debt and student loan debt reached record highs.

Reducing debt requires making payments on time, and can be expedited by paying more than the monthly minimum due and paying new charges in full. Automatic payments are an easy way to stay on top of debt payments.

Automatic Bill Payment is Seen as a Good Way to Manage Debt

You, the educated reader, have probably signed up for automatic bill payment (also known ABP or auto-pay) with many creditors and service providers. We are told that automatic bill payment will save our time, energy, and money. Creditors say if we use auto-pay we will never be charged a late fee or miss a payment again!

But is this strategy working for you as well as it should?

The Problem with Automatic Bill Payment

According to a recent study in the Journal of Economic Psychology, the use of automatic payments often means consumers pay less attention to their debts. In turn, the effect of inattention causes a higher level of indebtedness. Not only is there a risk of spending more, ABP masks the real cost of our total debt.

The study’s authors concluded that there is a “positive and significant effect of the use of ABP on the financial burden of households”.

ABP is Not All Bad

Automatic Bill Payment can be an effective tool if used correctly.

You can avoid late payment fees. With late fees running as high as $40, it is easy to see how paying timely can help avoid incurring unnecessary additional costs.

You can save time by not having to manually make the payment. No longer hunting down a paper bill, writing a check, then mailing it or having to log in to a website and ordering a payment each month or quarter is pretty attractive.

You can save mental energy by not having to think about due dates and payments. With bills on auto-pay, you no longer have to worry about recording or remembering due dates, as long as you keep your bank account full enough to cover all your regular bills.

You can pay down balances by making debt payments before you spend the money elsewhere. Choosing autopay means not having to decide to pay a bill. If you treat money as already spent, then you won’t be tempted to allocate it elsewhere.

You can increase your credit score by making timely payments. If you will need credit in the future, timely payments will help you maintain a good credit score.

You feel more organized and responsible when your payments are scheduled. The peace of mind that comes with knowing you are caught up on bill payments can free you to focus on other financial

The Downside of ABP

If you set it and forget it, you might actually be keeping yourself in debt longer or using more debt than you intended.

You might make a lower payment than you would if you paid attention. Setting a specific amount to pay each month makes budgeting easier, but had you paid attention, you may have concluded that a large payment was appropriate.

You might not realize how much debt you are carrying. When you know your bill will automatically be paid, you lose sight of the big picture of debt. Confronting the actual amount owed each month by manually making a payment will make the debt more obvious.

You may spend more each month if you are not paying attention. If your bill is on auto-pay, you may feel that small, additional charges are not increasing your debt by very much. Over time they will add up to more than you intended.

You may not realize your interest rate or fees have changed. Not reviewing your bill to make a payment? You may miss important changes to your terms that cost you money.

So What Can You Do Take Advantage of ABP and Minimize the Risk?

First of all, be mindful. Enjoy knowing that you have taken a positive step by making sure you never miss a payment if you are using ABP, but don’t lose sight of your debt.

Schedule a time each month to scrutinize your bills. Have there been changes to the terms and conditions? Make sure you are only paying what you agreed to. Contact your creditor to discuss any changes you don’t understand. Ask for an account review. Try to reduce your interest rate as your track record improves and payments increase.

In the U.S., read the disclosure on your credit card statement to learn how much you will pay in interest if you only make the monthly payment, versus making a higher payment.

Pay attention to your balance, fees and spending. Over the course of a month or so, it is easy to forget you used a credit card or added a new subscription. Suddenly your balance is increasing when you thought it was decreasing. Watch your statement carefully.

Beware of a falling minimum payment for debt. Has your minimum payment fallen as the balance has decreased? Don’t accept that declining payment as your default. You should aim to pay your debt off as quickly as possible.

Adjust your automatic bill payment frequently. As you get used to paying a set amount, it becomes easier to increase that amount a little bit more over time. Adjust your auto-pay to take advantage of this effect.

Make extra, one-off payments beyond the monthly minimum. Another strategy is to let auto-pay do the work, but to make intentional extra payments manually on a regular basis. Taking an extra chunk off of your bill is very rewarding.

Pay bills in full as often as you can. When you are able to, set your auto-pay to pay off your balance in full. Get used to only charging what you can pay off monthly.

Keep an emergency fund for truly unexpected events and stop relying on credit cards for months with higher expenses. Common occurrences like car and home repairs should be budgeted for, not treated like emergencies. Breakdowns are going to happen, plan for it.

Reassess All Your Payments

We have primarily discussed the pros and cons of ABP in terms of debt payments, but auto-pay is also common for subscriptions, utilities, and other recurring expenses that hit your cash accounts too. In those situations, some of the same pitfalls can occur, so take a look at all the auto-pay events you have scheduled.

You might find that you no longer need several overlapping streaming or media services. Has your electric bill has been creeping up? Think about reducing energy use. Are vehicle and home insurance rates silently siphoning dollars from your bank account? Time to shop around. Smart consumers know a good financial strategy starts with keeping more of what you earn.

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