How do automatic payments from a bank account work?
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To set up automatic payments, you give a company your checking account or debit card information and authorize them to electronically withdraw money from that account on a recurring basis.
You can set up automatic debit payments to pay the same amount each time, or you can allow payments that vary in amount within a specified range – for example, for your utility bill that changes each month. The company must let you know at least 10 days before a scheduled payment if the payment will be different than the authorized amount or range, or the amount of the most recent payment.
Benefits
Automatic payments can be a convenient way to make sure you pay your bills on time. You can set up automatic payments for utility bills, credit card bills, childcare fees, gym fees, car payments, or even a mortgage. Some lenders offer an interest-rate reduction on loans for paying by automatic debit.
Automatic payments vs. bill-pay
Automatic payments work differently than the recurring bill-pay feature offered by your bank. In recurring bill-pay, you give permission to your bank or credit union to send the payments to the company. With automatic payments, you give permission to the company to take the payments from your bank account.
Before you set up automatic payments
Verify the company
Before agreeing to let a company automatically take money out of your bank account, make sure the company is legitimate. Consider using a different payment method until you’re sure you’re happy with the company or service. Never give your bank account or debit card information to a company that you’re at all unsure about.
Know your rights
A company cannot require you to repay a loan by automatic debit from your checking account as a condition for giving you a loan, unless the loan is an overdraft line of credit. Be wary of a company that pressures you to repay by automatic debit.
Be careful about overdraft and nonsufficient funds fees
Automatic payments can help you avoid late fees on your bills. But if you forget to track your account balance and it’s too low when a payment is due, you might have to pay overdraft or nonsufficient funds fees. Both the bank and the company might charge you a fee if there is not enough in your account. These fees can add up quickly. Pay close attention to your bank account balance and upcoming automatic payments to make sure there will be enough money in your account when the payment is scheduled.
Review the terms of your agreement
The company must give you a copy of the terms of your payment authorization. The payment authorization is your agreement to allow the company to debit your bank account for payment. The terms of your authorization must be laid out in a clear and understandable way. It’s important to review the copy of your authorization and keep a copy for your records. Make sure you understand how much and how often money is taken out of your account. Monitor your account to make sure the amount and timing of the transfers are what you agreed to.
Learn how to stop automatic payments from your bank account.