Autopay is a tool.
Like any tool, autopay, if used properly, can be beneficial and if used improperly, can create problems for you.
But what defines proper usage?
In this article, we share with you our dos and don’ts when it comes to using autopay so that you can recognize what counts as the proper usage of autopay and what doesn’t.
That way, you’ll be able to use autopay solely for its benefits and not its problems.
Autopay, short for automatic payment, is a feature of both online banking and credit cards.
With credit cards, autopay exists so that you can automatically pay your credit card’s minimum balance or statement balance. Applied to online banking, autopay ensures that you pay the fee you owe for a subscription service on time or the amount you owe on a purchase that you’re paying off over time. For example, a car payment for that incentivizes enrolling in a monthly automatic payment.
Financial discipline is the key to financial health and eventual wealth so invest in financial habits that help set clear constraints on your spending. Discipline in this context means following your own internal rules when it comes to managing your finances and meeting your deadlines for payments, which is crucial to gaining an accurate picture of your financial health at all times. After all, what’s not measured can’t be managed.
For autopay, this means setting specific recurring dates for paying off certain subscriptions or credit card balances and then actually making payments on those dates. Create a rhythm to your autopays that you can sustainably follow so that you can have some long term clarity on your financial situation.
When you’re considering autopay for your credit card or for a subscription service, know how that item or credit card payment will fit into your overall finances.
Be sure to forecast the long term financial effects of a subscription or credit card payment. To do this, quantify how much you’ll be paying for a service or credit card payment on the same timescale as you get paid (for example, if you get paid weekly, think about your monthly or even yearly subscriptions in terms of weekly cost).
Don’t just pay the minimum. This applies more to credit card payments than subscription services. If you just pay the minimum on your credit card statement balance, over time, you will start seeing debt slowly build up.
Sometimes, we lose track of our autopays and end up paying for subscriptions that we’re simply used to when cheaper alternatives may be available. For example, a credit card that offers a lower APR or a subscription service that provides the same benefit but at a lower cost. Set aside some time every week or month to go over the subscriptions and automatic payments that you currently scheduled and always question if each subscription or payment is necessary or if there exists an option that can save you some extra cash each month. You can use the recurring payments tracker in Harvest Platform to help you keep track of all your autopays.
Also, consider cancelling automatic payments for subscriptions that you no longer use so that you don’t end up paying for services that you don’t really use.
This ensures that you:
The last thing you need is a bunch of autopays overdrafting your account, which can still lead to fees even if you’re not opted into overdraft protection (the fee charged is called an NSF fee instead of an overdraft fee).
Having your autopays clear in the first few days after you get your paycheck can also give you a sense of what’s left for you to work with until your next paycheck. Having this clarity can make it much easier for you to budget for expenses and also know how much you might be able to save from your paycheck.
Kicking payments down the road can not only damage your credit score but can also lead to potential fee penalties.
For credit cards, the negative effects of late payments are quite clear - a lower credit score, a potentially higher APR, and late fees. You might even end up having your card cancelled and your credit card debt sent to collections.
For subscription services, delaying payments might lead to repeated overdraft fees (if your bank account balance is near zero) as merchants repeatedly charge your bank account for what they’re owed.
To avoid the negative consequences of deferring payments, plan ahead. Plot out each autopay that you have scheduled for each month and then compare the total amount you need to pay to your income. If possible, dedicate a specific percentage of your income to autopays and ensure that you do not go above that percentage so that your autopays remain manageable.
Let’s say that you’re in the middle of your pay cycle and have ample funds to spare until your next paycheck. However, you still have your car payment and credit card balance to pay off - both are currently on autopay. “They’re covered,” you think to yourself, and after diligently allotting the required funds to pay those two autopays off, you spend the rest of your extra funds. Two days before your car payment is due, your car breaks down and you find yourself with barely enough cash to cover the repair costs, never mind paying your monthly credit card bill and car payment.
The lesson here is to be prepared and to not put yourself in a situation where there might be a risk of you not paying off your autopay items for the consequences of non-payment can be incredibly detrimental to your financial health. A tarnished credit score, higher interest charges due to a penalty APR for non-payment, overdraft fees - these are just three potential consequences of non-payment.
So save yourself the trouble and ensure that you have enough funds to cover whatever autopays you have left to pay off before you get your next paycheck. If at all possible, try to pay your autopays as soon as you receive your paycheck. If not, give yourself enough breathing room to pay and always stay prepared for any unexpected circumstances that may disrupt your finances.
Just because payments seem small does not mean your expenses aren’t adding up. For example, a weekly payment of $10 may seem small at first, but on a yearly basis can represent a significant expenditure. Understand that every bit adds up, especially when you’re living paycheck to paycheck and are always at risk of overdrafting. The average American has been found to pay $640 per year in subscriptions alone!
Losing track of your autopays can be disastrous so be sure to know when each of your autopays is scheduled.
Losing track of your autopays can also mean accepting your spending habits without questioning them. Redundancies in your spending and potential extra savings get ignored this way.
Hence the need for a regular audit of your autopays to assess whether each payment is really being made for necessary items.
Habits can be good and bad. A good habit is always paying your autopays on time. Every month, while auditing your autopays, challenge yourself by cutting out one of your subscription services or stopping yourself from using one of your credit cards. See how that changes your life and your finances. At the end of the month, evaluate whether the money saved from cutting out that subscription or that credit card outweighed the benefits of keeping it around. Did you not even notice the absence of a credit card or subscription? If so, it’s time to cut it out.
Autopay is a tool. Used properly, it can lead to good habits. Used improperly, it can fuel bad habits. Know the different behaviors that lead to both good and bad habits, act on your knowledge, and you’ll be able to reap the benefits of having a tool like autopay by your side without its negative consequences.