O'Connor: Paying your bills can be risky business
One of the general topics of any personal finance column is how to pay your bills, but this one is literally about HOW to pay your bills. Check? Credit card? Automated debit? Beads and trinkets delivered by carrier pigeon?
All those methods have their advantages, and one of my co-workers, the Slow-Cooker Goddess, has pretty much run through them all, save for the last one, probably because it gets expensive, what with having to keep a constant supply of Purina Pigeon Chow on hand.
Originally, she paid her mortgage with a check in what was a pretty reliable system: Mortgage statement arrives, triggering the impulse to act like a responsible adult, which results in mailing the mortgage check. Then her bank changed things so that her mortgage statement showed up just a few days before it was due. This prompted the Slow-Cooker Goddess to consider an automated payment from her checking account, which she could set up through her online banking.
Instead her bank manager suggested authorizing her mortgage bank to suck the money out of her checking account on the due date, through an automated clearing house transaction, or ACH. Convenient? Yes. Cheap? Yes, it's free. Reliable? Well ...
Between you and biller
Here's the problem with an ACH: It's strictly between you and the biller you authorize to withdraw cash from your bank account. Say you authorize Dangerously Big Mortgage Bank (slogan: "Danger is our FIRST name!") to debit your account for your home loan, and DBMD makes a mistake and charges your account early or twice in the same month or for the wrong amount. Now it's your problem to get DBMB to fix its own mistake — not your bank. And if DBMB's screw-up causes you problems because you were short on cash, or cause your checks to bounce and generate a couple of $35 non-sufficient funds charges, you'll need to ask DBMB to reimburse you for the losses, which it likely won't do.
With an ACH transaction, your bank is strictly the middleman. It can't block a recurring ACH until you first inform the biller to stop debiting your account. Your bank needs three days of warning to cancel an ACH after that, and can then request written notification. After that point, the bank is required to block new ACH debits from that biller at no charge to you.
Not that it always works that way. In November 2012, First Bank of Delaware paid $15 million to settle Justice Department charges that the bank allowed shady online merchants to illegally debit more than $100 million from its account holders. It was part of a number of banks that profited on fees by turning a blind eye to third-party payment processors who fronted for scummy online vendors and payday lenders.
Not that Dangerously Big Mortgage Bank would be pulling that kind of scam on you. And using your own bank's online bill-paying comes with its own issues. For instance, my bank was routinely debiting my automated mortgage payment three or four days before the date I specified, causing a shortfall on more than one occasion. That's not a problem with an ACH, but it turns out to be specifically allowed by the 62 pages of fine print in the agreement covering my checking account.
So, authorizing an ACH can be easier to manage, but it still makes me nervous, so I've limited it to just one or two trustworthy institutions, and I keep a sharp eye on my checking account just in case there's a mistake.
Limit bank account access
In general, it's best to limit access to your bank account to just yourself. Authorizing payment to a debit card tied to your checking account can create some of the same problems as an ACH — once your money's gone, there's no guarantee you'll get it back. When possible, have automated payments — and online purchases — paid with a credit card, where you have much more protection under federal law, and can enlist Visa or American Express in reversing a bogus charge.
And, of course, there's always the good-old fashioned paper check and the U.S. mail, where the only reminder you need is your calendar.
Whatever method you choose, understand the risks and monitor what's going in and out of your account. As for these carrier pigeons, I'll be passing them on to the Slow-Cooker Goddess. Not to pay her bills, but because I hear she's got a great recipe for Lipton Onion Soup mix over squab.
Brian O'Connor is author of the award-winning book, "The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese."