I’m a big believer in the set-it-and-forget-it lifestyle. I have cleaning products and paper goods delivered to me monthly via an automatic subscription, so I never have to think about whether we’re running short on laundry detergent or toilet paper. I’ve set up automatic transfers to savings and retirement accounts each month, so I never have to think about building my emergency fund and my nest egg. And I have several of my bills automatically paid out of my checking account so I never have to remember a due date. (See also: 5 Ways to Automate Your Finances)
Of course, what I love about all of this automation is exactly what makes automation potentially costly: When you don’t have to think about something, you might end up forgetting about it.
While automatic payments allow you to effortlessly stay on top of your bills and other financial obligations, they can also become a budget leak that you aren’t even aware of. Here’s what you need to know about the downside to automatic payments, and how to make sure you don’t automatically waste your money. (See also: 7 Ways Auto-Payments Can Screw You)
Automatic payment or gray charge?
Automatic bill payments that you’ve willingly signed up for can be a great way to manage your money and avoid late charges. But some automatic payments are actually what’s known in the industry as “gray charges.”
These are little recurring automatic payments that you have not necessarily agreed to and do not know about. For instance, I had to deal with a gray charge earlier this year when I realized (after several months had gone by) that I was being charged twice a month for a single digital newspaper subscription service. It turned out that each of my two subscriptions was associated with a different email address, and I had not realized I’d accidentally signed up for the second subscription.
I have no one to blame but myself for that unnecessary subscription charge, but most gray charges have much more pernicious origins:
“Free” trials that require a credit card: With this type of gray charge, the merchant is counting on you to forget that you provided a credit card to sign up for a free trial. Once the trial period ends, the merchant charges your card. These types of charges account for nearly half all gray charges.
Phantom charges: These gray charges piggyback on an online purchase you did make. With these types of charges, you might be charged for an extra product or service that you didn’t request. For instance, a consumer might pay for their credit score without realizing they have also signed up for (and will be charged for) monthly credit monitoring. Phantom fees account for 18 percent of all gray charges.
Zombie charges: These types of gray charges are well-named, since they are the automatic payments that simply will not die even after you cancel your subscription or membership. A common example of a zombie charge is the gym membership fee that is charged to your credit card even after you have quit the gym. Zombie charges account for about 6 percent of gray charges.
The high cost of forgotten automatic charges
According to a study by Aite, gray charges on credit cards accounted for more than $14 billion in 2012, which translated to approximately $215 per cardholder.
It’s completely understandable how this can happen. Often consumers will agree to a charge without realizing it because they did not read the terms of service. At that point, it’s up to the consumer to notice the recurring charge on their account — and it often takes several months before the cardholder notices. By the time consumers realize what has happened and cancel the service, it often seems pointless to try to reverse the previous months’ charges.
In addition, the majority of gray charges are perfectly legal, which means it can be next-to-impossible to get previous months’ charges reversed. The companies that are using gray charges to pad their bottom lines are counting on the apathy and inattention of the average cardholder, and they unfortunately have the law on their side.
Combating gray charges
There are several options for keeping unnecessary automatic payments from taking a bite out of your budget.
1. Calendar reminders can keep you from paying for “free” trials
The companies that offer “free” trials assume that you will forget when the trial period ends — and they already have your payment information. The best way to take advantage of free trials is to set up a calendar reminder for the day before the end of the trial. That way, you’ll remember to cancel the subscription a full 24 hours before you might get charged.
2. Read through the fine print
Skimming through the terms of service may be no one’s idea of fun, but it’s a lot better than having to make an angry call to customer service several months later and several sawbucks poorer.
3. Research complaints about phantom charges
Before you buy, Google the company whose product or service you are considering to see if anyone has had trouble with phantom charges from them. Then you’ll know what to look for in the terms of service and you can determine if you can avoid charges by unclicking a box — or just choosing a different merchant, if necessary.
4. Review your statements regularly
Making a monthly date to look over your credit card and bank statements will help you identify gray charges as soon as they occur. You can call to cancel these subscriptions or notify your credit card that you would like to dispute the charge. In many cases, your credit card company will reverse the charges if you can prove that you did not consent to recurring charges.
5. Use apps to monitor your accounts
If you would rather not the spend the time combing over your accounts and canceling unnecessary automatic payments, there are several apps available that will do the work for you. Clarity Money helps you organize your entire financial life, including helping you to find and cancel unused subscriptions. Trim identifies recurring payments that can be canceled and will take care of contacting the merchant on your behalf to do so. Truebill notifies you of subscriptions that can be canceled and offers you a one-click cancellation process.
Stay on top of your automatic payments
Automatic payments are a major boon to busy budgeters. But it’s important to remember that your automatic payments should be like the cruise control on your car: It can relieve you of a little work, but you can’t fall asleep at the wheel. No matter how automated your financial life may be, you need to still keep an eye on things to prevent automatic payments from causing a financial crash.