Q: I sometimes have that occasional oops moment (like with my water bill last month unfortunately) where I’ll count something as paid, even to the point that I could have sworn that I saw it come out of the bank account. Then when I get the next bill I find that I did not pay that item at all.
I decided to set up direct debit from the bill accounts to prevent this from happening in the future. Our due date is the same day each month so I have reminders in my calendar set up to tell me what is coming out on each paycheck so I can make sure that the money is in that account. We have multiple accounts set up with the bill account separate from everything else.
It does make it easier to budget and I know that my bills are always getting paid, but I’ve had alot of people telling me that direct debit is a bad idea. Is it a bad idea? If so why?
A: I think that auto draft can be a good thing, but there are downsides.
One downside is the fact that any businesses who have access to your account can overcharge you. When that happens it can start a chain reaction of overdraft charges, which ends up costing you money. This can especially be a problem with gyms/fitness centers.
Another downside is the fact that using auto draft can put you on “autopilot” and keep you from realizing how much you are paying. If you never notice that the water bill increased by $50 last month, you may not realize that you have a leak, for example.
Auto draft can be a good thing if you have trouble keeping up with incoming bills. I have one friend that this works really well for. They make a little more money and always have a surplus in the checking account of several hundred dollars, so it isn’t a problem if an accidental overdraft occurs. They like the fact that they don’t have to worry about the bills being paid. With that being said, they never had any idea of how much their power bill was because they didn’t look at it.
I don’t use auto draft because I don’t like other people having access to my checking account, but I would be more inclined to sign up for it with a utility company because they are established businesses and they should take care of any problems fairly quickly.
To avoid paying late charges I either pay bills as soon as we receive them, or I place them in the Finances section of my Brain in a Binder (watch my video here) and make a note on my calendar on the Friday one week before it is due (because we are paid on Friday). When that date arrives, I simply go to the pocket in the binder, pull out the bill and pay it from that week’s paycheck.
The key to making this plan work is to ALWAYS place the bills in the planner and write a note on the calendar immediately when the bill comes in the mail. If you put the bill down on a table or desk, you will probably find it there under a pile of papers a month later and realize that you didn’t pay it on time.
The important thing is to find a system that works well for you and it sounds like you have. I would just keep a cushion of extra money in the bill account in the event of an overdraft and not worry about it.
If you use auto draft to pay bills, leave a comment and let us know how it works for you? 🙂
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James Edward says
We have auto draft set up for our house payment, and it has worked fine until tonight. It is set up to go out the 15th of every month, but for some reason today (the 11th) the bank decided to go ahead and make the payment four days before we get paid, leaving us over $400 overdrawn. Auto drafts are set up on a specific day for a reason. Why would the bank think it is ok to take out such a large payment so early?
Kimberlee Stokes says
I am so sorry that this happened to you. I would definitely go into the bank to speak with the manager about the issue and insist that they return any fees associated with the withdrawal since it was their fault.
Salliemae charges me $1 from my bank’s bill pay… So my payment was short and they penalized me. Upon calling them they did offer direct debit as a solution and would even offer a discounted percentage rate. What a scam!!
For us, auto draft works for the mortgage, which doesn’t vary (no escrow), and student loans, because we get a discounted interest rate for using it.
I’m too paranoid to use it for anything else. With my luck, I’d totally ignore/miss the one month of the year when the utility company trues up the budget billing. Online bill pay works out great though!
I use billpay through my credit union. I have a system where when the bill comes in I take it to my computer and verify that it is scheduled. I then put a check mark on it and note on it how much I paid… (I try to always pay at least 2 times the payment on credit cards and such as I am focused on becomming credit card debt free.) I am retired and on a fixed income and bills are billed twice a month which keeps things simple… but I am on my computer a lot so it is easy to check my credit union billpay frequently to make sure things are as they should be. It works for me!
(As a former banker) Something to keep in mind if you set up bill payment through your financial institution…. the date that you set up to pay the bill is not necessarily the date the business will receive it. It could actually be days later when they receive it. I didn’t like that I can’t control when they receive it, so I pay everything online through the business’s website. That way, I get an immediate confirmation that the bill has been paid and our balance is zero. I did set up auto-draft for some life insurance policies that we have had for years because it’s a 10-year policy and the premium is fixed. I also write all bill dates on a calendar and have for years. I agree that each should have a habit that works for them.
Good point–thanks Mandy!
True in some cases! Depended on how big the business is (say a utility company) they may be set up for electric draft, and then they will receive immediate payment. Smaller companies or your grandma in another state, they will receive a paper check printed by the bank and be at the mercy of the mail. At our bank, it shows the expected arrival date of the payment so you have knowledge of it. I use this method most times, however, if I need something to get there quicker, I go directly to the company’s website. (Even then the don’t all post same day, some are 2-3 business days later.)
Again, you control the date amount and frequency yourself when you use bill pay. More importantly, pay attention to your online transactions!
I only use autopay if it’s for a bill that is the same every month (like my health insurance or my Netflix), or if I get a discount/interest rate reduction for doing it. Otherwise, I like to pay everything at once and I do still pay online via their websites or billpay. The only thing I mail in is my car payment, because they don’t offer online payment.
No no no no no never would I use auto draft computers make mistakes too and with my bank if something goes thru and I dont have money in there they pay it anyways and I owe them money, I wouldnt want to be the lady in texas who got a million dollar electric bill bc the electric company computer messed up then have my bank pay it and have to spend forever convincing two people that it was wrong and not my fault, I write my bills on a sticky note in my balance book and pay them with debit card monthly marking off as I pay them then I always know whats paid and whats not.
Good idea to find the system that works for you. For us – if it can be automated, it is but I have a lot of trust in my bank – a mean a lot since they also hold our insurances, children’s savings and investment (USAA, if you were wondering).
The bank is the one that prints and sends the checks, the bill payees have no more access than if I’d written them a check myself, less access I feel like since they don’t have my signature. Having the bank, who already has access to our money, handle thing is what works for us.
I used to use the auto draft option one our credit card – we always the pay the balance in full every month, and I check the statement online every few days to make sure there are no unknown charges, so I figured it would be easier to set it up to be paid automatically a few days before it was due each month. This worked fine for the first few months, but then I started having recurring issues with the bank, the short version is this: I would get an email stating my autopayment had been posted on the date I had scheduled it, but it wouldn’t show up on my credit card statement until a few days AFTER the bill was due. As a result, the bank tried to charge late fees and restrict rewards earned on previous purchases. After 4 phone calls with 3 different supervisors because this happened two months in a row, I was able to get all late fees reversed (not just waived – I pushed to get them reversed, so they wouldn’t show up on my credit report, since I hadn’t actually made any late payments), and one supervisor even admitted that this was a tactic the bank used to collect additional fees, because they assumed that a lot of customers using autodraft didn’t pay as close attention to their bills and monthly charges. Needless to say, I changed the payment options and have gone back to writing the bank a check each month rather than risk paying online and having the bank mess up the payment posting.
Very interesting. It just goes to show that you have to pay attention whatever method you use. Thanks for sharing Bethany. 🙂
I am not a banker, but I totally agree with Char on this. Online banking is the way to go. You can set up autopayments for regular bills through the bank instead of with each other institution.
Amanda @ The Fun Mommy says
I agree, especially where you comment that you don’t like others having access to your account. That’s the very reason I hate auto draft. We used to use it for our internet bill, which was scheduled to come out on the 15th. Except sometimes it would come out on the 15th, sometimes the 17th, sometimes the 21st, and then one very memorable time it came out on the 12th which caused a huge domino of overdrafts and bounced checks.
Leanne Matthews says
I use auto draft to pay a lot of my bills because it helps reduce my stress level. I know they’ll get paid on time and I don’t have to worry about it. I use auto draft for my internet, electric, and renters insurance.
However, for each of these bills I also have an email notification set up that tells me the amount of the bill a week or two before it is due, so I know how much it is and can keep track of what I’m spending and do something before the bill is due if I think the charge is incorrect.
I am a banker. 🙂 And striving to get out of debt! That being said, I recommend Bill Payment through you banks online banking program. You can set dates yourself, and control them, yourself, within the bill pay system. If you want it to be recurring each month, you can, but you can cancel or change the date/amount at any time!! When you use auto pay with a business, it’s a pain to stop it, change it, or control it. So my answer is, you can still have it come out automatically, but do it yourself through your banks online bill pay program! (You can also set up automatic transfers and alerts to let you know if you balance is below a certain amount or a bill has been paid, ad more!)
This is what we do as well. We have everything set up through our bank and my husband does all of it online. There are a few things that are automatic like the mortgage. Several we go in and pay when we get the bill. So we still receive paper bills in the mail to keep up with the expenses. Anytime there is a rate change for our insurance, we get a statement detailing the changes. Netflix automatically comes out every month. We set that acct. up to use our debit card. My husband sends me bank statements every week through email. So I am able to check everything with what I have written down. We usually have a little extra in the checking acct. to cover any oversights. We were very hesitant to start online banking. But after 18 yrs. of taking care of all the bills myself, I told my husband it was his turn. This is how he choose to do it. Now we both work on it.
This is one of the reasons I switched all my bills to my bank’s billpay vs paying through the individual company websites. There’s a wide variety of billing practices and the quality of that company’s billing department (one of the reasons we cancelled our home phone service and rely on strictly cellphones is because our local phone company has a HORRIBLE billing department that was making mistakes all the time, even when we didn’t use and autopay system).
The other problem is that if you set up automatic payments through an individual company’s website and don’t use their website often, it’s easy to forget your password for that website when you need to change/cancel that automatic payment. It seems like everyone has different rules for passwords, and some companies make it really hard to reset your password when you forget.
But with everything at my bank’s BillPay, I don’t have to worry about that so much. It’s not like I’m going to forget my online banking password, since I’m logging in frequently. I even have some bills where I have automatic payments AND set up reminders like Millisa. Even though I have the bills set to autopay, I still make sure to open the important bills either in hard copy or email, like utilities and credit cards (even if it’s zero balance, I ALWAYS check that bill to make sure it’s still zero! Can’t be too careful with identity theft and such out there).
I only do auto draft from my checking account on my mortgage and credit union loans. I have each of my other bills (utilities, credit cards) set up on their website to email me when the bill is due in 10 days and after the payment has been received.
Just like with my budget — I prefer to be involved — even if that means that I have to manually go pay a bill. I pay all my bills on my Credit Union’s epay so I can track all my payments in one place.