automatic payments Archives

automating debt — Image Source: 123rf.com

Automation sounds like a stress-free way to manage debt. If payments are made on time, you’ll never have to worry about missing a bill. Many borrowers don’t realize that automating debt can sometimes lead to higher interest rates. The very tool designed to simplify your finances may quietly be costing you more in interest, late fees, and lower credit scores. Here’s how automating debt could be raising your rates.

1. Minimum Payments Keep Balances High

Minimum payments are just that, the bear minimum. Most lenders encourage autopay, but they often default to the minimum monthly payment. That keeps your balance higher for longer. So, the amount of interest you pay will be higher. Paying only the minimum will trap you in the debt cycle. If you are automating your debt, you have to adjust the payment amounts. Otherwise, you’ll be stuck with long-term debt.

2. Interest Rate Hikes Go Unnoticed

When credit card or loan interest rates increase, many borrowers don’t realize it right away. Autopay means the bill gets paid, but you may not notice the higher charges. If you’re automating debt, you may be blindly accepting higher rates without adjusting your payoff plan. Over time, this compounds your costs significantly.

3. Hidden Fees Slip Through

Automation can also make borrowers less attentive to statements. Late fees from returned payments, processing charges, or overdraft fees may go unnoticed for months. Small fees can add up quickly over time. Automating debt without close monitoring lets lenders benefit from your inattention.

4. Credit Utilization Stays High

One of the biggest factors in your credit score is credit utilization. This is the percentage of available credit you’re using. If autopay only makes minimum payments, your balances remain high. High utilization can lower your score. Down the road, it could mean higher borrowing costs if you apply for a mortgage or car loan, for example.

5. Overdrafts Trigger Chain Reactions

Autopay requires money in your account. It’s easy to overdraft if all of your bills are on autopay. Overdraft fees can quickly pile up. Plus, missed payments damage your credit. Automating debt without carefully timing payments increases the risk of these costly mistakes.

6. Lenders Reward “Set It and Forget It” Borrowers

Automation benefits lenders because it keeps borrowers paying indefinitely. Credit cards profit from you when balances are high. By automating debt, you become the perfect customer. Over time, your loyalty to autopay costs you more than it saves.

Ditch The Automation

Automating debt isn’t always a bad idea; it ensures payments are never missed. But without vigilance, it can quietly keep your balances high and interest rates higher. The key is to review statements monthly, pay more than the minimum, and stay aware of changing rates.

Redefining iGaming Through Innovation, Engagement, and Global Reach With Soft2Bet

Teri Monroe

Teri Monroe started her career in communications working for local government and nonprofits. Today, she is a freelance finance and lifestyle writer and small business owner. In her spare time, she loves golfing with her husband, taking her dog Milo on long walks, and playing pickleball with friends.

They weren’t exactly forgotten, but unpaid all the same.

Our habit for doing our budget and paying bills consists of throwing everything in a pile and then sorting through the file when we sit down to enter all the data for our budget into the spreadsheet. One of the first things we do is go through and find the unpaid bills and pay them. When we sat down to do budget last night, we found our mistake. One of the bills was sitting at the bottom of the pile. Not a big deal, until you consider that we hadn’t been doing very well on regular budget checks and the due date for the bill had come and gone already. Ouch. To make matters worse, it was a credit card, so we’ll see what kind of late fees and default rates we end up with next month.

Lesson learned. From now on, we’ll be paying bills as they come in instead of letting them wait until we do our budget work. The other thing that I’ve been contemplating is to set most everything up on automatic payment systems. I’ve been super hesitant to do this before because part of our financial history is a history of not having the money to pay our bills. So, my fear has always been that if they come out automatically, the money won’ t be there, or the money won’t be there later on to pay for something more important. Now that we’ve taken on budgeting and a much higher control over our money, that really isn’t a valid fear anymore and we could probably set up some automatic payments.

How do you all do it? Pay as they come in? Automatic deductions? Or do you pay them at a set day or event?

Shane Ede

Shane Ede is a business teacher and personal finance blogger. He holds dual Bachelors degrees in education and computer sciences, as well as a Masters Degree in educational technology. Shane is passionate about personal finance, literacy and helping others master their money. When he isn’t enjoying live music, Shane likes spending time with family, barbeque and meteorology.

How Automating Your Debt Is Quietly Raising Your Interest Rates