Ask Liz Weston

Get smart with your money

automatic payments

Q&A: Paying bills with auto payments is scary; should it be?

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Dear Liz: For several reasons you recommend using online services from the bank or credit union to pay bills. I use that method for most of our bills, but not all. Some vendors want us to set up a process where they are able to pull the desired payment directly from our account. Given the regular reports of data breaches at corporations that should know better, I refuse to give them the required permissions. Am I wrong in this?

Answer: The issue is less about potential breaches and more about getting automated payments to stop when you want them to.

Some companies make it easy to sign up for their services and devilishly hard to cancel them. Gym chains are notorious for this. Federal laws protect your right to cancel automatic payments, but you may have to enlist your bank to get the most pernicious companies to stop charging you.

If you have any doubts that your cancellation order would be honored, consider setting up automatic payments using a credit card instead of giving the company direct access to your checking account.

Q&A: Can my credit score really be marred over $20?

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Dear Liz: I have had great credit for years. Late last year, I somehow overlooked a $20 payment due from one of my credit cards. My score dropped by more than 50 points, from about 815 to 765. I quickly paid the $20 and contacted the issuer. They told me they were required by law to report my delinquent payment, which I found out was not true. I went back and forth with them, but they would not do anything to help. I did file an inquiry with one of the credit bureaus, but I was told there was nothing they could do without the issuer’s cooperation. I spoke with someone in the issuer’s corporate offices, but he could not have cared less. It turns out that this hit on my credit could last seven years — and all over $20. I charge thousands of dollars every year on credit cards and pay the balance every month. Is there anything else I can do to restore my credit to the previous levels?

Answer: The federal Fair Credit Reporting Act does require creditors to report accurate information to the credit bureaus. However, some people say they’ve been able to get their accidental late payments removed by writing “good will” letters to their issuers. These letters explain what happened, emphasize the customer’s previous record of on-time payments and politely request the issuer extend some good will by removing the one-time lapse from their credit reports.

Your issuer is under no obligation to grant your request, and some categorically say they won’t. But it can’t hurt to try.

You also can use this incident as a reason to review how you pay your credit cards. Setting up automatic payments to cover at least your minimum payment will ensure this doesn’t happen again. Keep an eye on your credit utilization as well. Aim to use 10% or less of your credit limits. If you find it difficult to keep your charges below that level, consider making multiple payments each month to keep your balance low.

The unexpected drop in your credit scores was painful, but the good news is that you still have great scores. This oversight is unlikely to have any lasting effect on your financial life. And if you continue to use credit responsibly, your scores will improve over time.

Q&A: Automatic payments

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Dear Liz: Since I lost my second job, we have fallen behind on our bills. Although we get paid on Friday, by Monday our checking account is in the red even without buying anything.

It’s all going to automatic payments for things like insurance and college savings for our child. I think the bank has a way of processing transactions to maximize our bounce fees. Should we take control and pay manually? Is automatic payment a recipe for disaster?

Answer: In your situation, yes, because you’re spending more than you make. The bank’s fee-maximizing policies aren’t helping matters, but the fundamental problem is that you’re living beyond your means.

Your first step should be to use a refund calculator to see whether you can lower your tax withholding and take home more in your paychecks. Turbotax has one on its site called TaxCaster that’s easy to use. If you’re on track to get a fat refund next year, adjust your withholding so you can get the money now, when you need it. The human resources departments at your jobs can help with this.

Once you have a clear idea of your current income, review your spending to see where you can cut. Those college contributions should be among the first to go. Yes, you want to educate your child, but other expenses — including current bills and retirement savings — must take priority until your income is higher. Slashing expenses may be painful, but it’s necessary to avoid going into debt or incurring unnecessary bank fees.

You can call the bank and ask it to turn off bounce protection on your debit card transactions, but you may not be able to do so for automatic payments or checks. If that’s the case, you may want to discontinue automatic payments until you get a better handle on your finances.

Another option, if you want to continue with automatic payments, is to sign up for true overdraft protection. This is less expensive than bounce protection and taps your savings or a line of credit if an automated expense exceeds your balance.

Automatic payments are a great way to make sure your bills are paid and that you don’t incur late fees. Automatic payments also can protect your credit, since skipped payments on credit cards and loans can devastate your scores.

But you have to be able to keep a pad of cash in your checking account or have low-cost overdraft protection. If you can’t, automatic payments can cause more problems than they solve.

Friday’s need-to-know money news

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financial doomToday’s top story: Five signs of impending financial doom. Also in the news: Spring cleaning your finances, the risks of automatic bill pay, and why you should keep a burner email account.

5 Signs You’re Financially Overextended
Your finances could be heading for disaster.

7 tips for financial spring cleaning
Time to clean the dust out of your wallet.

The Hidden Risks of Paying Your Bills Automatically
Automatic payments could leave you short on cash.

Why I Keep a Burner Email Account
An alternative email address could help protect your identity.

Automatic payments for charity: pros and cons

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Dear Liz: You recently suggested people consider putting their charitable donations on automatic. While I have automatic deductions for savings because I do not want to constantly remind myself to do it, I want to remind myself of all other expenses. For me, prudent money management requires attention to all expenses. Your thoughts?

Answer: Many people find that automatic payments make their lives easier. They’re able to meet their obligations (and avoid late fees, in the case of bill payments) while minimizing time spent in repetitive tasks each month.

But none of your expenses should be “out of sight, out of mind.” Automatic payments don’t eliminate the need to carefully review your credit card and bank transactions each month. Reviewing your bills periodically, and making adjustments as necessary, is an important part of responsible money management regardless of whether you take advantage of automatic transfers.