Autopay Is Making Us Worse at Managing Credit-Card Bills

 Setting up automatic payments is the easiest way to manage your credit-card bills. It is also costing many consumers money.

By setting up automatic payments, or autopay, you authorize companies to pull money directly from your checking account to settle recurring bills. It has been a standard feature for fixed expenses, such as cable, for more than a decade and is becoming more popular for bills that fluctuate from month to month, like credit cards.\The share of credit-card accounts enrolled in these automatic payments roughly doubled between 2015 and 2020 and continues to rise, according to data from the Consumer Financial Protection Bureau, or CFPB, and industry executives.

In theory, higher autopay enrollment should lead to reduced credit-card fees since customers who sign up for automated payments are less likely to forget to pay and thus can avoid late fees and interest charges. Yet the total fees and interest paid by cardholders rose 19% to around $240 billion from 2015 to 2020, according to federal data.

Consumers often wind up underpaying when they autopay, according to a study by Jialan Wang, associate professor of finance at the University of Illinois Urbana-Champaign and a former economist for the CFPB. Borrowers who use autopay pay off between 8% and 17% less of their monthly credit-card balances compared with customers who make manual payments, according to the study.

Smaller payments then lead to paying more in interest, which might offset the benefit of avoiding late fees, especially as interest rates rise, she said.

When credit-card customers sign up for autopay, they typically have three options for monthly payments: the required minimum, the statement balance in full or a custom amount. Most people who enroll in autopay choose either the minimum payment or full balance, said Wang.

Those who pick “pay in full” when they set up their automatic payments are more likely to change their settings within the first 10 months since this option is less affordable in the long term, her 2022 study for the National Bureau of Economic Research suggests. Those who pick “minimum payment” tend to keep that setting.

Today, more than three-quarters of people are using autopay for at least one bill, said Derek Swords, vice president of digital payments at Fiserv, a payments company. Automatic payments are becoming more popular because of their convenience, he said.

Most consumers are more comfortable setting up recurring payments as subscription models are used for everything from streaming services and gym memberships to coffee and lingerie.

“It’s a set-it-and-forget-it mindset,” Swords said.

Banks like it too. Customers who are on automatic payments pose half the risk of customers with similar credit who aren’t on autopay, said Max Axler, chief credit officer at Synchrony Financial, which services more than 70 million credit-card accounts.

“If I had my way, I’d have 100% of our population enrolled,” he said.

Credit-card companies usually give customers who occasionally miss payments the benefit of the doubt and assume they simply forgot. Late payments typically aren’t reported to credit bureaus until they are more than 30 days late.

Accounts that unenroll from autopay before their balance is paid in full or have multiple automatic payments returned for insufficient funds raise immediate red flags, said Axler.

“It’s not uncommon for that person to go delinquent,” he said.

While autopay enrollment has no direct impact on credit scores, being perceived as riskier by your bank could make it harder to get approved for more credit or lead to reduced credit limits, according to financial advisers.

At Capital Services, a credit-card company that manages the card portfolios for a number of regional banks, 0.3% of autopay plans are terminated every month for insufficient fees.

That churn rate isn’t high enough to raise alarm, but it is high enough to show that autopay isn’t viable for everyone, Sherry Tunender, senior vice president at Capital Services, wrote in a letter to the CFPB viewed by The Wall Street Journal.

“Individuals who have enrolled in [autopay] but whose payments are getting returned should not have been enrolled in the first place,” she said.

The only surefire way to avoid fees and interest charges with autopay is to pay off your balance in full. But that only works for people with reliable income and steady spending habits. Overdraft fees can offset any savings from late fees if you spend more on your credit card than you have in your checking account.

You can avoid overdrafts by scheduling your automatic payments on days you are paid instead of using the default statement date, Wang said.

There is also value in paying your bill the old-school way, manually, according to financial advisers. Actively managing your account helps you stay on top of your spending and spot any fraudulent charges.

“Autopay has not really changed very much for many years, and whether or not consumers use it, it’s not necessarily serving them that well,” said Wang.

https://www.msn.com/en-us/money/personalfinance/autopay-is-making-us-worse-at-managing-credit-card-bills/ar-AA1hRbfC