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Automatic bill payment
Question: I understand that credit card companies take a dim view of certain credit-using behavior when deciding on your interest rate. For instance, I've read on this site that you shouldn't use credit cards at the salon, at bargain stores, or for purchasing alcohol. What about monthly bills, though? American Express offers double rewards points for setting up your monthly bills (utilities, cable, phone service) to be paid automatically with the card. I already have these bills set up to be paid automatically from my checking account each month anyway, so is there much difference in shifting them to my AmEx and gathering the extra rewards points (to transfer to frequent flyer accounts, or to help out with Christmas gifts, etc.)? And will this have a detrimental effect on my credit score? Suzanne, Rochester, NY
Answer: The biggest factor in determining your credit score is paying bills on time. (It accounts for 35% of the score.) So, it certainly doesn't hurt your credit score to pay them automatically, and it will probably boost it over time. By the way, it doesn't matter whether the bills are paid on time by check, automatic withdrawals from your checking account, or automatic bill paying through your credit card. Of course, the key to the latter method is paying the tab on your card on time.
The credit card companies are replicating the mistake of the recording industry. They are going after customers, changing the rules of the game without notice, closing accounts, raising interest rates, hiking fees, and cutting lines of credit. In trying to lower the overall risk of their credit card portfolios it looks like red flags were raised when customers shifted from shopping at premium stores to discount emporiums. The data mining into our habits and behavior is breathtaking--and disturbing.
Still, the industry would go out of business if it denied credit cards or hiked rates on everyone who on a monthly basis got a haircut, went to a liquor store, picked up household items at a bargain basement store and groceries at discount warehouse. What they're really looking for is abrupt changes in spending that might signal financial trouble. In a sense, with regular bill pay you are steadfast and you get the rewards you want. (There is another whole question about rewarding credit card companies for their behavior, but that is for another forum.) For more on credit card company behavior and your spending habits check out this terrific interview my colleague Tess Vigeland had with Charles Duhigg.
If you're responsible with money it's probably best to use a credit card with an automatic payment instead of a checking account. The reason is that so long as you are well under your credit limit you don't need to worry about overdraft fees and the like from the bank--and those fees are costly.
For several years, I used my Costco AmEx card responsibly ... and extensively. Very much like Suzanne is suggesting. After all, with a new wife and new baby, I was buying a lot at Costco for the household practically every week (groceries, household supplies, baby supplies, prescriptions, you name it). This earned a fat, juicy rebate rate, enhanced an add'l 1% by my Costco Executive membership. I got an even more generous rebate percentage by buying gas at Costco. But the real rewards were in using my AmEx for daily and recurring expenses like groceries, utilities, etc. These "nickel and dime" expenditures can total $2000 a month for some households. Expenses that I paid off monthly ANYWAY, but this way, the cash stayed in my bank account (earning a wee bit of interest, too) until my semi-monthly 100% payoff to AmEx. For a couple of years, I received nearly the maximum allowed rebate from Costco and AmEx, hundreds of dollars, with not a cent in fees charged to me. That was better than a CD or money market -- I didn't invest, just charged purchases a particular way and paid them off within 30 days!
My rationale was that instead of balancing a spreadsheet for my banking accounts, and credit account, my banking sheet was very simple and with few transactions (and, by the way, very few people got checks or had transactions from my bank), and really the bulk of my "transaction comparison check" was with the credit card. Another perceived benefit: dispute protection with my credit card that debit and bank transactions didn't grant me.
... Of course, this all backfired when the new wife/mommy refused to return to work, unemployment struck me, other crises ensued, and the marriage went down the toilet, leaving me with thousands of $ in marital debt, including a huge credit debt. But with all things equal, the plan worked and works again for me, if only with other credit cards.
Just my two cents, but it's a good privacy practice when doing this to get a new credit card, and card #, from the issuer every year or so. You have to update a lot of automatic payment plans, but it makes sure that the number isn't abused and the fraudulent charge isn't lost in the deluge of legit transactions.
Paying your monthly bills on your credit card makes those CC companies a lot of money. Remember they make about 2-3 percent for each transaction, and an automatic payment is kind of guaranteed money for them. So I would guess they decided to give you more of a share of their profits.
The utility in question would probably like you to use your banking account because banks don't charge as high of rate, thus "saving" 2-3 percent.
However, it doesn't matter to you either way. You pay the same amount whether you use a bank account or a credit card, so why not use a credit card and get some benefit.
BTW, where you shop is only going to affect your score by a few points if at all, and life is too short to worry about such things. Just pay your bills on time and save some money.
