In 1972, a group of California banks established the Automated Clearing House (ACH) as a collaborative effort with their regional Federal Reserve to make clearing electronic transactions a simpler process. Word of its success spread so quickly that the process soon went national. Today, that means a much quicker electronic clearing process across the banking industry.
For you, that means the convenience of being able to set up automatic bill payments, usually from the comfort of your home. After a quick look at the nuts and bolts, we’ll offer a guide to successfully managing your bill payments using electronic funds transfers.
When you set up an automatic bill payment with a company—mortgage lender, utility, etc.—you do so by giving them your account number and routing number, and then authorizing an ACH transfer. You tell them to debit a certain amount from your account on certain days each month.
On those days, your biller sends a request to your bank to transfer the funds. Your bank puts a hold on those funds, meaning that they’re still in your account, but unavailable for your use. The accounts are then double-checked to make sure that the payer’s account has adequate funds, and the money is officially transferred.
Using ACH to simplify your finances is actually fairly easy. The one drawback is that because everything happens automatically, you run the small risk of forgetting an upcoming transfer and bouncing an electronic check. But, as we’ll see, that’s a relatively easy pitfall to work around.
First things first: if you aren’t using direct deposit for your paychecks, start! Having your pay deposited directly into your account via an ACH transfer saves you the hassle of having to deposit a check, and helps remove the possibility of bouncing a payment check because a paycheck wasn’t deposited on time.
Next, you’ll want to make sure that your checking account (the account you’re probably using for most of these transactions) has an overdraft account, preferably the high-interest earning account in which you keep your emergency savings. This way, if for some reason you balance your checking account improperly, you won’t be hit with massive fees for bouncing a check and can draw from the secondary account.
Finally, you’ll want to gather all of your payment and paycheck schedules onto a single calendar. On the calendar, indicate every payment and the day you expect it to be pulled from your account. Also indicate every paycheck for you and your spouse and the amount you expect it to be for.
This allows you to see your expected balances in the foreseeable future. If your wages fluctuate, only include the minimum you expect to make at a certain date. It’s always best to plan for the worst. This tool will help you make sure that you will have a large enough balance to cover upcoming electronic payments.
You should closely guard all of your account numbers, including the one you use for ACH transfers. Someone with this number could certainly use your information to make fraudulent charges on your account.
This is why you should only set up ACH transfers with reputable vendors you trust. Fraudulent charges using your account number are illegal. For this reason, reputable companies can usually be trusted with your account number. No reputable business wants to suffer from legal action, or to develop a reputation for improperly charging customers.
That said, you should always keep a close eye on the transactions posted to your account. If you see any suspect charges, contact your bank immediately.
If it’s a fraudulent charge, ask your bank to change your account number immediately. This will mean you’ll have to update your direct deposit with your employer, and with any companies with whom you’ve set up an automatic transfer. That said, the inconvenience of updating those accounts will be well worth preventing any further fraudulent charges.
As long as you’re keeping tabs on your checking account, setting up EFTs for paying bills is a great way to ensure that your bills get paid on time – without your having to write a bunch of checks every month.