Could Credit Card AutoPay Boost Your Score?
By Eva Norlyk Smith Ph.D.
January 10, 2012
Paying bills on time is critical for a good credit score. If late payments are an issue for you — or if you just want to avoid the hassle of juggling multiple credit card bills each month — there's an easy fix: set up automatic payments to your credit cards from your checking account.
Autopay “accomplishes several things,” writes blogger Kate Ashford on Her Two Cents. “Thing One: I never pay a late fee. Thing Two: I never pay interest charges. Thing Three: I never panic at 11:59 p.m. on the day that my credit card bill is due.”
While automatic credit card payments are convenient, they're not necessarily a good fit for everyone. Here are the pros and cons.
You'll save time and trouble.
Many Americans actively use multiple cards. It's not unusual for people to rotate charges among two to three rewards credit cards to maximize rewards earnings, for example. Some may also have a low interest credit card dedicated to carrying balances or a balance transfer card that is not being used for new purchases.
Using multiple credit cards can be a great way to maximize benefits. However, keeping track of multiple credit card payments can be a nuisance — and linking your credit card to your checking account can be a great way to ensure that payments get made on time each month.
It will help keep credit cards active.
Credit scoring models reward people who show they can manage several credit accounts, so using multiple credit card accounts actively can help boost your credit score (as long as you don't keep high balances). This will also protect you against credit limit cuts or account closures, which card issuers may otherwise resort to if the account goes unused. Credit limit cuts could hurt your credit score, since card balances now will be a higher percentage of the remaining credit limit.
Automatic payments are a great way to keep unused credit cards active without extra bill payments. Set up one monthly charge (a water bill or electric bill, for example) to the credit card you want to keep active. Next, set up an automatic payment from your checking account, so that the credit card bill gets paid each month.
Your overdraft risk is higher.
Unless you have a comfortable cushion of cash in your checking account, there is always a risk that the automatic credit card payments may create an overdraft.
“Do not do this if you play the 'Will-That-Payment-Bounce?' game with your checking account,” notes Ashford. “If your credit card tries to deduct a payment from your bank account and your balance doesn't cover it, sheer madness (and charges) will occur.”
What Ashford is referring to is the triple whammy of a checking account overdraft fee, a returned credit card payment and possibly a late payment, if you don't catch the mistake in time.
You can reduce this risk by setting up the account to pay just the minimum monthly amount due on the credit card bill each month. However, that's not an ideal solution either, since carrying high-interest credit card balances can hurt both your credit score and your pocketbook.
How to fix: Set the automatic payment to cover the minimum monthly payment each month, and then manually pay any additional amount you can afford each month as well. This solution voids much of the convenience of automatic payments, but at least you're insured against late payments.
Fixed monthly payments could trip you up.
Some automatic payment options give cardholders the choice to also pay a fixed amount on the credit card bill each month. While that may seem like an ideal solution to the above issue, it can get tricky as well.
For example, for someone carrying a 0 percent annual percentage ratio (APR) balance on a credit card, making a fixed monthly payment would make sense. However, once the 0 percent APR expires, interest charges will make monthly payments go up. If the amount you set for the fixed monthly payment is too low, you might find yourself paying less than the minimum each month — a big credit score mistake.
How to fix: If choosing this option, set the amount comfortably over the current minimum payment, and actively keep on monitoring the credit card account.
It's easier to overlook unwanted charges.
Once a credit card bill gets set to automatic payment, it's tempting to just forget about it. This can backfire. There may be monthly subscription payments that you have forgotten about and don't really want to keep, charges for items you've been meaning to return or even fraudulent charges.
How to fix: Never neglect to look through your credit card bill each month before filing it away. It will take minutes and could save you money.