Automating Your Bills Can Be Dangerous, Automate with Care
Bill automation is a popular topic among personal finance circles. The concept is simple: use the internet, apps, or other technologies to automatically pay your bills so you can set it and forget it.
Purpose of Automation
The purpose of automating your payments is to free up more of your time while ensuring your bills get paid by the due date every month. (Assuming you have money in your account.) Setting up automated payments means you tell your little technology minions to transfer money from your checking account to the bank accounts of people you owe money to. But if you set up the automated payments wrong, the result could be disastrous.
The Right Way to Automate
You should use your financial institutions' free bill pay system through your online banking. This service allows you to send a check to any company, and even any person, with the click of a mouse, and for free. When my wife and I bought our last car, we took the finance documents we got from our credit union and created the bill payments. We told our credit union how much to send each month and what date to send it on sot it arrived by the due date. We also set when to stop sending payments. That was the last time we ever dealt with and ever will deal with our auto loan payments.
The Wrong Way to Automate
You also can automatically pay your bills by going to the individual vendors' websites and setting up payments for each vendor. Most companies allow you to set up an automatic payment on their website, whether they are your mortgage, car payment, utility bills, or even things like Netflix and gym memberships.
When you set bill payments up on their websites, you are setting up an Automated Clearing House (ACH) transaction, which is an electronic transfer between their bank and your bank. Setting up ACH transfers may seem like no big deal, but they are a bad idea for three reasons; they are inconvenient, they are difficult to manage, and they are dangerous.
Using the billing company's website to set up the automatic payment means that you need to remember every login and password in order to make changes to your account, the payment amount, the payment date, or any other element of the payment. When it is all done through your checking account you need to remember one account login. Imagine the difference if you decide to change your bank. You would have to log in to each company website one by one and enter in the new checking account information over and over again.
Added to the inconvenience is the fact that using ACH transactions through the billing company makes it very difficult to manage your finances. Almost every bank/credit union bill pay system gives you a summary screen of all recently sent and future bills. All your bills that have recently been sent and all the payments that are scheduled to be sent over the next month can be seen on one webpage. And most banks will auto-calculate the future balance after all your bills are paid.
Setting up multiple ACH transactions would require way too much work to see how much money you'll have in your account after all your bills are paid. First you'd have to log into each account, write down the future payment amounts and dates, then total all those amounts, then log into online banking to get your current balance and do one final math problem to subtract unpaid bills. No wonder no one knows how much money will be in their account in the future.
But beyond the convenience and management issues, ACH transactions are dangerous. When you give the other company permission to reach into your checking account and take out money, you have done just that. No limit is placed on how much money they can reach in and take, or how often they can do it. You have literally given them access to all of the money in your checking account at any time they want.
LA - A Cautionary Tale
In 2013, customers of the Los Angeles Department of Water and Power (LADWP) found out the dangers of these ACH transactions first-hand. The city government-run utility company updated its billing system in 2013. Due to a mismanaged roll-out, customers were over-billed, some by thousands of dollars. If you pay bills through your financial institution's online bill pay system, you would recognize that this wasn’t an accurate billing amount and would call the utility before sending in a payment.
Those that had set up the ACH transaction through the LADWP, however, saw their checking account raided for the full amount due. Many customers had their entire checking account emptied shortly after payday, leaving them with literally no money left in their account to pay rent, their car payment, or even buy food. Worse yet, if the money didn’t cover the entire amount of the billing error, customers reported that the LADWP threatened to cut off their electricity.
Fortunately, the LADWP, being a government agency, was focused on the citizens they served. They refunded $8 million of the money their system had effectively stolen from customers. The only problem: the system had over-billed customers by an estimated $44 million. It took two years and a class action lawsuit to force the agency to finally commit to returning the over-billed money.
If you currently have bills set up for ACH transactions against your checking account, you should immediately go onto bill pay to set upautomatic payments you’re in charge of, then call the billing companies to cancel the transaction and take away their ability to reach into your account.