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How Automatic Bill Pay Can Help Your Credit

Using automatic bill payment tools can ensure your bills are paid on time every month, saving you from the damaging effects of late payments on your credit. Automatic payments, also known as autopay, are available from many lenders, credit card issuers, and financial institutions to help you never miss a monthly payment deadline.

Besides benefiting your credit by helping you avoid late payments, autopay can help you avoid late fees that can increase your credit card balances or deplete your checking account.

How Automatic Bill Pay Can Help Your Credit

Payment history is the most significant contributor to your credit scores, accounting for 35% of your FICO® Score and about 40% of your VantageScore. Setting up autopay ensures that your payments are made on time, which can help improve your credit.

While you may face consequences from your creditor in the form of late fees and other penalties if a payment is just one day late, the late payment won’t immediately be reported to the credit bureaus. As far as your credit is concerned, a payment is considered late once 30 days have elapsed from your payment due date.

Consistent on-time debt payments are key to score improvement, and even one payment that’s 30 days overdue can cause significant harm to your scores. That late payment will remain on your credit reports with the three national credit bureaus (Experian, TransUnion, and Equifax) for seven years. Over time, the late payment’s effect on your credit can diminish, but it has the potential to affect your credit score for the entire duration it appears on your credit report.

How Autopay Works

Autopay works like this: You give your creditor permission to access your checking account, and when your payment is due, they withdraw an amount you designate to cover the bill.

Installment Loans

With installment loans such as mortgages and auto loans, the amount due is the same each month. Your lender may give you the option of withdrawing a full payment on the monthly due date or taking out half of your payment every two weeks, on days of the month you specify.

Credit Cards and Other Revolving Accounts

Because balances on credit card accounts and other forms of revolving credit such as home-equity lines of credit (HELOCs) and personal lines of credit typically vary month to month, many card issuers give you the following options when using automatic payments:

• Make the minimum required payment: This guarantees your payment will be recorded on time and as required under your cardholder agreement. If you have high balances and want to lower your interest charges, however, you may want to make an additional manual payment for an amount that makes sense in any given month.
• Pay the last statement balance in full: Paying all the charges incurred in your last billing period preserves your payment history and can prevent you from having to pay finance charges on most credit cards. When using this option, it’s important to ensure there’s always enough in your checking account to cover the full balance, so be careful on months when you make unusually large purchases.
• Pay a custom amount: This allows you to set a specific payment amount to be made each month, with a couple of exceptions to be aware of: If your minimum required payment in a given month is greater than the custom payment you’ve set, the card issuer will withdraw the minimum payment amount. If your balance is less than the amount you designate, the card issuer will only withdraw enough to pay that balance.

Utility Payments and Other Bills

Many utility companies, cellphone carriers, and property management companies offer the ability to make automatic payments on bills or rent. If yours does not, your bank or credit union likely offers an automated bill payment service you can use to submit payments automatically.

While this can help you avoid late-payment fees, it historically didn’t benefit your credit scores unless the billing entity reported payment information to the national credit bureaus, and most landlords and utility companies do not. The free Experian Boost® feature changes that by letting you share your utility and cellphone bill payment history on your Experian credit report. A strong payment history can bring immediate improvement to FICO® Scores based on your Experian credit report.

What to Watch Out For When Using Autopay

The biggest risk you run when using automatic payments is having an insufficient balance in your checking account when a creditor attempts a scheduled withdrawal. If that occurs, it could trigger a late fee from the creditor and an overdraft fee from your financial institution. If your checking account balance fluctuates widely, or if you anticipate a period where you’ll be running up unusually high card balances (during a vacation or honeymoon, for example), it might be wise to pause autopayments or adjust their settings to avoid excessive withdrawals.

Another strategy for avoiding autopayment surprises is to designate one card for use when making large purchases and to make sure its autopayments are set conservatively (or skip autopay on it altogether).

A less obvious danger in using autopayments is getting too lax about monitoring your accounts for suspicious activity. Just because you’re not actively paying bills each month, don’t forget to review your credit card bills and checking statements for activity you don’t recognize. Unauthorized transactions could be signs of credit fraud or identity theft, so you should watch for them and report them to the creditor or financial institution as soon as you spot them.

The Bottom Line

Automated loan and credit card payments can simplify your monthly finances, prevent late fees, and help build a history of timely payments that leads to credit score improvement. Using autopayments on your cellphone or utility bill, when combined with Experian Boost, is yet another way to harness technology to help build your credit scores.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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