The easy way that carries risks

A handwritten cheque in a stamped envelope is still the most common method Americans use to pay their monthly bills. But automatic electronic payments are becoming increasingly popular.

Some 3.3 billion automatic bill payments were made in 2006, a 50 per cent increase since the turn of the millennium, according to the Nacha, the industry association for electronic payments.

The increase in automatic payments mirrors the rise in electronic banking overall: A Federal Reserve study found that the number of electronic payments made with credit or debit cards exceeded cheque payments for the first time in 2003. Of course, that includes any type of purchase, not just automatic payments to cover monthly expenses such as housing, electricity and cable.

Switching from cheques to automatic payments is a "no brainer," says Richard Virgilio, spokesperson for Nacha. He lists the myriad benefits this method has for consumers. For one, automatic payments are cheaper - the average family can save $150 a year on cheques, envelopes, late fees, and stamps. You can also save time and help the environment, Virgilio says. Nacha estimates that every 38,000 bills paid electronically save two tonnes of trees, 16,450 gallons of water, and 1,941 pounds of solid waste.

But before jumping on the electronic-payment bandwagon, financial advisers say you must weigh the risks. And unless you take steps to reduce those risks, the switch may actually cost you money over the long run.

Risk 1: Overdraft fees

Automatic payments take the human error out of bill paying - no bill disappears in the shuffle at home, no cheque gets lost in the mail. Using this method also frees you from sitting down each month with a chequebook and a stack of bills. And that can be a double-edged sword.

"If you were the sort of person who lets the bills pile up and pay them all in a rush, on the one hand, you're not going to get late fees from the people you're paying [by cheque]," says Rick Miller, CEO of Sensible Financial, a financial-planning service in Cambridge, Massachusetts. "But on the other hand, you do run the risk of overdrawing [your chequing account]. There is no perfect solution."

One way to mitigate the risk of over-the-limit fees - in addition to keeping close check of your finances - is to set up direct payments with a credit card with a high limit, rather than to your chequing account.

The American Banker reported that people who used their debit cards - for any reason - more than 20 times in a year paid more than five times more in insufficient funds fees than people who did not use their debit cards at all, according to a study of 50 banks conducted by Furnace, Giltner and Associates, in Austin, Texas.

Among other advantages to using a credit card for your automatic bill payments are increased protection for fraudulent or disputed transactions and, if you have a rewards card, cash back and airline miles.

Keep in mind, just because late fees are less likely with automatic payments, that does not mean you will never have another late payment problem. Even with direct payments, there can still be the rare glitch.

"It was Keystone Cops, it was so bad," says Debra Borchardt, assistant editor at TheStreet.com, who missed a mortgage payment when her mortgage carrier's automatic payment service provider dropped a digit from her bank account number. It took two months to resolve the problem - in correcting her bank account number, the company mistakenly changed her routing number. By the time she realised her payment was late, she says, her husband had already spent the money.

Risk 2: Letting overcharges slide

Many who already use automatic bill payments have seen it happen. Your cellphone bill suddenly has a $15 internet connectivity charge or your TiVo bill increased without warning. Whether it was your mistake - you failed to read the fine print and unwittingly agreed to the extra fee - or that of the company, you end up being charged more than you originally intended to pay.

Paying bills automatically can make some people less likely to notice, and therefore dispute extra charges. Though these fees are small, over time they can eat into that $150 in annual per family savings.

Not that everyone minds.

Laura Lin, an analyst in the investment management industry, says that fears of overpayment had led her to be wary of signing up for automatic payments. But after a number of late payments, she decided to autopay her gym membership and cellphone bill. She still does not closely monitor either bill, but all in all, she says, she prefers automatic payments. "If it's a couple bucks difference, whatever. If it's a big amount, then I'd definitely notice."

The important thing, she says, is that she now makes her payments on time.

But for those who want the best of both worlds - on-time payments without extra fees - some banks have online services which make electronic payments easy to monitor, automatically categorising and tracking different payments. Consumers can quickly identify expenses that increase in a month, and then go to their bills to find the extra charges.

Another option, says Miller, is to use the automatic payment option only for bills whose monthly charges don't vary much. "It's worth thinking carefully about which ones you automate or which ones you don't," he says.

Risk 3: Sticking with services longer than you otherwise would

Perhaps, for companies, the greatest advantage of direct payments is that it takes effort for you to stop paying them. It's easier to simply do nothing. This inertia tends to increase the length of time you remain a customer - which can be good or bad, depending on whether or not you want to keep receiving whatever product or service you're buying.

"A few years ago, I bought a friend of mine a one-year subscription to the New Republic," says Conor Friedersdorf, a freelance writer and graduate journalism student at NYU. "It turned into a three-year subscription to the New Republic."

While he still has not got around to cancelling, Friedersdorf says he has become more cautious about which payments he makes automatically, and which payments he has to actively pay each billing cycle. "I know myself well enough to know that 50 per cent of the time I'm not going to make the effort to cancel it," he says, adding that he often won't sign up for something he otherwise would have if the only option is to sign up with autopay.

Risk 4: Cancellation problems

Even if you remember to cancel something you no longer want, automatic payments may continue. Signing up is easy, but many companies may require advanced written notice to cancel payments. Even with a written notice, some cancellations can get lost in the shuffle.

Worse still, the problem compounds if several different automatic payments need to be cancelled all at once.

"We had a very hard time when a client had her purse with all of her checks stolen and closed all her bank accounts," Lauren Lindsay, a Louisiana-based personal financial adviser, wrote in an e-mail. "Because of timing issues, it was hard to stop or change some of the auto-payments and she incurred fees and late penalties as a result, as well as bounced checks."

The long and short of it? Autopay is convenient, but no panacea. If you're not careful, you may end up spending the time autopay saves you each month cancelling services later and the money saved on extra unnoticed charges down the line. But putting in a little extra time up front can keep your monthly bill-paying experience reasonably hassle free. And in cases where automatic payments are not appropriate, you can always pay by cheque or (gasp) cash.