Why You Should Setup Automatic Payments

Most of us have a credit card or multiple cards. When paying the balance on these cards, there are two options – manually pay each month or setup automatic payments (autopay). If you have not already setup autopay, do it. We will discuss in detail the benefits of autopay and why manual payments are not advisable.

What is credit card autopay?

Autopay is the automatic payment of your monthly credit card bill. Each month, you will be issued a credit card statement with your account balance and due date. When setting up autopay, you have several options. You can setup autopay to pay the entire statement balance, to pay the minimum balance due, or to pay a dollar amount you specify. The absolute best option is to setup autopay for the full statement balance. If you pay off your credit card every month before the due date, then you will never accumulate interest. However, if you have a large balance on your credit card, then paying off the entire balance may not be an option. Rather, you will have to steadily pay down the balance. Aside from paying the full balance, the two remaining options are to setup autopay for the minimum balance due or a dollar amount you designate. Paying the minimum balance is the worst move you can make financially. Credit card interest rates typically range from 19% to 29%. Therefore, if you only pay the minimum balance due, you will pay an exorbitant amount of interest. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (Card Act) requires that your credit card statement include how long it would take to pay off the balance if only the minimum payment is made.

Should I pay the minimum balance due?

Strive to pay more than the minimum balance due. The below examples show the dangers of only paying the minimum balance. If you have a starting balance of $1,000, and the interest rate is 19%, then making the minimum payment (interest accrued + 1% of the balance) would take 115 months (over 9.5 years) to pay off the balance. Additionally, you would pay $989 in interest, nearly doubling the initial amount of your $1,000 balance.

Using the same interest rate and minimum payments, a starting balance of $10,000 would take 344 months (28.5 years) to repay, and you would pay $15,239 in interest, making the total amount due $25,239. Therefore, if you started paying off this balance at 30 years old making only the minimum payments, you would be 58.5 years old by the time it was paid off. The bottom line is do not make only the minimum payment.

What should my credit card payment be?

If possible, pay off the entire statement balance. If this is not feasible due to the size of the balance, then develop a plan to pay off the balance as quickly as possible. Establish a budget using this "How to Create a Budget" guide and pay off the credit cards with the highest interest rates first. Determine your essential expenses (groceries, housing, medical, and other items you cannot live without) and cut the discretionary spending (entertainment, dining out, etc). You will need to make these temporary sacrifices to achieve financial freedom. Once you have cut discretionary spending, determine the difference between what you earn and the essential expenses, then allocate the majority of that amount to paying off your debt. For example, if your net monthly income is $2,750, and your essential expenses are $2,450, then you can allocate $300 per month to paying off your credit card.

Why should I setup autopay?

One of the most important reasons to setup autopay is to avoid late payments. The biggest factor influencing your credit score is paying your bills on time. To know more about factors that impact your credit score, check out "Credit Scores." Life is busy, and you cannot afford to damage your credit score because you forgot to pay your credit card last month. The second reason to setup automatic payments is to ensure you get out of debt as quickly as possible. The most appropriate way to use a credit card is to make your monthly purchases and pay off the balance each billing cycle. However, this is only possible if you live within your means and do not spend more in a given month than you earn. If you are carrying a balance on your credit card, eliminating this debt is the quickest way to free up additional income. Rather than paying 19-29% interest on the balance, the amount you were paying will now be available to allocate towards savings or other categories in your budget.

Some individuals advocate for manual payments because it allows them to monitor their credit card spending; however, nothing prevents you from doing this with autopay. If you want to utilize autopay and still monitor your credit card payments, which is important to ensure there are no unknown charges, setup a recurring calendar reminder to check your statement each month or review your statement each time the payment processes. The only caveat to setting up autopay is that you must ensure the balance in the bank account used to pay the card is always sufficient. Otherwise, you could overdraw the account and be charged an overdraft fee.

Conclusion

Setting up autopay will ensure you never miss a payment and continue to strengthen your credit score. Additionally, by automating your payments, you are assured to make progress in paying down the balance. Ideally, pay off the balance every month. If the balance is too high to accomplish this, pay off as much as you can afford until the balance is paid in full, then maintain the habit of paying off the statement balance and never letting it accrue. Setting up autopay does not give you the liberty to ignore your credit card, you will still need to verify the charges on your statement each month to ensure there are no unauthorized charges. These unauthorized charges could be the result of fraud or a subscription you cancelled that continued to charge you.