What Are the Benefits of Direct Deposit and Automatic Payments?

A woman sits at her dining room table with laptop and financial reports doing her monthly budget.
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Now is a particularly good time to consider automating many areas of your finances. With direct deposit of your paychecks and automatic payment of your bills, you don’t need to worry about mail delays and shuttered bank branches. You can access the money faster, avoid missing deadlines that could hurt your credit score and you may even qualify for discounts and other perks. And automating your savings and investments can prevent you from trying to time the market and make it easier to reach your financial goals. Here are nine benefits of direct deposit and automatic payments:

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You’ll Get Paid Faster Wherever You Are

If you don’t already have your paychecks deposited directly into your bank account, now is the time to make the change. You’ll get the money no matter where you are — even if you’re working remotely or traveling — and you’ll know exactly when it will arrive. You usually need to provide your employer with your bank account number and your bank’s routing number, and sometimes a voided check. You can (or may have to) sign up for direct deposit of other payments, such as your Social Security benefits, pension payouts, military retirement pay and unemployment benefits.

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Your Tax Refund (and Stimulus Payments) Will Arrive Faster

The fastest way to get your tax refund is to file your return electronically and have your refund deposited directly into your bank account — the money will generally arrive within 21 days, according to the IRS. You can input your bank’s routing number and your account number directly onto your Form 1040, or submit Form 8888 if you want to split your refund among up to three accounts or use it to buy savings bonds. See the IRS factsheet for more information. The IRS also uses any direct deposit information from your last tax return on file when making stimulus payments.

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You Won’t Miss Bill-Pay Deadlines, Which Can Help Your Credit Score

Having your regular bills paid automatically from your bank account simplifies your monthly financial tasks. It also helps you avoid missing payment deadlines that could result in late fees and hurt your credit score (your payment history is the most important factor in your credit score — see “What’s In Your Credit Score” at MyFico.com). “By making regular on-time payments, you can boost your credit score and further demonstrate your credit history to future lenders,” said Jon Giles, head of home equity lending at TD Bank.

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More: 30 Things You Do That Can Mess Up Your Credit Score

It’s easy to set up automatic payments for your fixed bills, such as a mortgage or car loan. Be careful when setting up autopay for variable payments, such as credit card bills, if you may not always have enough money in that bank account to pay the full bill. “With variable payments, you can opt to automatically pay the minimum balance every month as not to incur a late fee, but then pay the full amount if your budget enables it,” said Ana Gonzalez Ribeiro, an accredited financial counselor with Rise Up Financial Coaching in Bronx, New York.

 See: Tips To Keep Your Finances in Order Without Sacrificing What You Want

You May Get Discounts on Your Car Loan, Home Equity Loan and Other Debt

You’re not the only one to benefit from automatic payments. “Banks like it because it means that they’re more likely to get paid on time,” said Matt Schulz, chief credit analyst at LendingTree. “With any lender, it’s a good idea to ask if they offer any perks for signing up for autopay.”

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For example, TD Bank offers home equity loan borrowers a discount when they sign up to make ACH payments (electronic payments) from a TD account, Giles said. “It gives qualified borrowers the opportunity to ensure they make payments on time while saving on a monthly basis,” he said.

Find Out: 9 Bills You Should Never Put on Autopay

Schulz said that some banks reduce the interest rate on personal loans by 0.25% when you pay via automatic deductions from a checking or savings account, or they may offer a special benefit for making 12 or more consecutive monthly payments in full and on time. “Autopay can make sure that happens,” he said. Check your bank statements regularly to make sure the correct amount is being debited.

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You’ll Get a Break on Student Loan Interest

Signing up for automatic payments can also give you a break from your student loans. For example, students who enroll in auto debit for Sallie Mae’s private student loans can qualify for a 0.25 percentage point interest rate discount/reduction, said Ashley Boucher of Sallie Mae. “To qualify, customers should log into their account, either on their mobile app or on the website, and they’ll be prompted to enter their bank account information,” she said. You need to be up to date with your loan payments to qualify for the discount.

Most reputable private lenders offer an autopay discount of at least 0.25 percentage points, said Andrew Pentis of StudentLoanHero.com, an educational resource for student loan borrowers. “So, if you qualify for a private student loan at 5.00%, for example, enrolling in autopay can lower your rate to 4.75%,” he said.

 Read: 10 Small Changes To Stay On Track With Your Savings Goals

You May Get a Discount on Your Car, Home or Renters Insurance Premiums

Some insurance companies offer discounts for setting up automatic payments from a checking account, credit card or debit card, said Loretta Worters of the Insurance Information Institute. The specifics vary by insurer, but it may be a one-time discount of $50 to $100, she said. And paying your other bills automatically can also help your insurance premiums — you’ll be less likely to miss deadlines that could hurt your credit score, and your credit score can affect your insurance premiums in most states.

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You’ll Make Saving a Priority

If you have a 401(k) at work, you know how the automatic contributions make it easy to save. “Automatic contributions make saving more convenient and can help keep individuals on track with their financial goals, without needing a reminder,” said Mike Kinane, head of consumer deposits, products and payments for TD Bank. “Auto contributions are a good way to ‘set it and forget it’ as well as reduce the temptation to spend the funds elsewhere.”

You can also set up automatic contributions into your IRA, emergency fund or other accounts. “It’s a great way to continuously add to your nest egg or emergency fund without having to think about it every month,” Ribeiro said. “You will also habitually adapt to working with the money you have left over and force yourself to work around the money you are saving. This will come in handy by preventing you from overspending or perhaps by helping you stick to a budget if that is your goal.”

Find Out: 17 Clever Ways To Save More for Retirement

It Can Help You Reach Your Financial Goals

“I guide my clients by taking a goals-based approach,” said Matt Fleming, senior financial advisor with Vanguard Personal Advisor Services. “To begin, I work with them to determine what they are saving for, how much they’ll need, and their target date. Whether they are saving for retirement, college or their next vacation, I develop a personalized financial plan designed to achieve their goals. But what’s the point of a plan if you don’t stick to it? That’s where automatic investing comes in. An automatic investment plan simplifies the investing process, easily aligns with a monthly budget and eliminates the temptation to direct funds elsewhere. Consistent contributions will help you reach your goals faster, and automatic investing helps ensure you stick to your plan.”

Also, investing a fixed amount every month or quarter — called dollar-cost averaging — helps you avoid trying to time the market. Rather than getting scared and selling when prices drop — or waiting too long to invest — your fixed investment will buy more shares when the price is low.

More: What Is a Certified Financial Planner and Do You Need One?

Signing up for automatic investments may also reduce the minimum investing requirement for some mutual funds and (often combined with paperless statements) may help you avoid some fees.

It Makes It Easy To Pay For Subscriptions — but Sometimes Too Easy

“I would be careful of automatically paying for subscriptions, video streaming services and gym memberships,” Ribeiro said. “These are services that you really have to make sure you are using on a regular basis. Here, I would first be extra careful of adding any extra services to my household expenses. Carefully consider the service you are interested in and try it out for a couple of months before deciding to have the service long-term and adding it as an automatic payment. It’s too easy to forget you are paying for it and you are not even using it.”

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Review your bank and credit card statements every few months and make sure the subscriptions are still worth the money. A few small charges every month can add up to hundreds of dollars over the year — and dropping a few subscriptions can be an easy way to cut back on your spending.

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Last updated: Feb. 22, 2021

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About the Author

Kimberly Lankford has been a financial journalist for more than 20 years. As the “Ask Kim” columnist at Kiplinger’s Personal Finance Magazine, she received hundreds of reader questions every month about insurance, taxes, retirement planning and other personal finance issues. Her financial articles have also appeared in the Washington Post, U.S. News & World Report, AARP Magazine, Boston Globe, PBS Next Avenue, Bloomberg Wealth Manager and Military Officer Magazine, and her syndicated columns were published regularly in the Chicago Tribune, Denver Post, Baltimore Sun and other papers.
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