The Risks of Automatic Bill Paying: How to Avoid Online Money Traps
The Prevalence of Automatic Payment Errors
When Ashley Weeks's health club offered her a cheaper membership if she had her monthly payments automatically debited from her bank account, she jumped at the chance. After all, the contract was only for a year, and if she didn't renew, her gym membership and the payments would end right then, no questions asked. "When the charges continued after the year had ended, I thought my gym had made a simple mistake," she says. "But when I protested and the debits continued, I felt deceived." Weeks's health club ignored her complaints and continued charging her for three months, only stopping the withdrawals from her account after she threatened legal action. Her money was never returned.
The popularity of automatic debiting services, which include payments you authorize your bank and credit card company to make on your behalf to creditors, other credit cards, and service providers, is soaring. The National Automated Clearing House Association (NACHA), a nonprofit rule-making group representing more than 12,000 financial institutions, says some 12 billion automated payments were made in 2004. The advantages for the consumer are obvious: These transactions are paper- and stamp-free, and payments are always made on time (preventing late fees and extra interest charges). For banks and merchants, electronic payments are usually cheaper to process, so they encourage their use by pairing them with bargains or interest-rate discounts on loans.
But, as Weeks discovered, no system is foolproof. Banks, credit card companies, retailers, and service providers can and do make errors -- or may even try to cheat you. Certainly, billions of these transactions are processed each year without incident, but the number of unauthorized debits has increased 68.5 percent from 2002 to 2005. According to NACHA, there were 3 million such incidents in 2004 alone. The most common causes are errors (incorrect amounts or dates entered), but buyer's remorse (when a consumer authorizes a payment but later changes her mind) also plays a role, as does fraud, says Michael Herd, NACHA spokesman.
Weeks may never know whether her health club was hoping to bill her indefinitely, or if there was a legitimate mix-up. But either way, the lesson is the same: Automatic doesn't necessarily mean accurate. Enrolling in automatic payment plans shouldn't lead you to ignore your accounts. Most unauthorized debits can be prevented or caught early enough to fix if you stay on top of your finances. Read on to find out how to protect yourself against some of the commonest unauthorized debit risks.