Every time your employer automatically deposits your paycheck into your banking account, you’ve received an ACH payment. Each time your auto insurance provider automatically deducts your premium from your checking account, that’s an ACH payment, too.
But what does ACH stand for? Are an ACH payment and an ACH transfer the same thing? And what are the benefits to consumers?
Here’s what you need to know about ACH.
What does ACH stand for?
ACH stands for automated clearing house, which is a system run by the National Automated Clearing House Association that facilitates electronic payments and automated money transfers between banks. In 2019 alone, the ACH Network processed 24.7 billion electronic payments, making it one of the largest U.S. payment systems.
So what exactly is an ACH payment?
At its most basic, an ACH payment is a way to move money between banks. But instead of using paper checks, wire transfer, credit card networks, or cash, an ACH payment — also known as an ACH transfer — moves money electronically between banks through the ACH Network.
There are two types of ACH transactions:
- Direct deposit: A direct deposit is a credit transaction, such as receiving your salary from your employer or when a friend or family member sends you money through a third-party app like Venmo.
- Direct payment: A direct payment is a debit transaction, such as when you pay credit card bills from your checking account or you set up recurring bill payment with your utility company.
What are some common reasons to use ACH transfers?
There are many reasons both individuals and businesses make use of computerized payments. Some of the most common uses of ACH payments include:
- When your employer directly deposits your wages into your bank account
- When you pay recurring bills automatically, such as your electric bill, credit card, or mortgage
- When you send money to friends and family using Zelle, PayPal, or Venmo
- When businesses make payments to vendors and suppliers
- When you move funds from one bank to another bank
Other types of ACH transfers include direct deposits from dividends, Social Security, and other government benefits; charitable giving; tuition; and subscription services.
How does ACH work?
To set up an ACH payment — whether it’s moving funds to or from your account — you need to authorize those transfers by providing your bank account and routing numbers. A common way to do this, especially when setting up automatic payments with billers or direct deposit with employers, is by providing a voided check.
Keep in mind that, in some cases, the funds only move when you say so, such as when you pay a friend back for dinner through Venmo and you tap “Pay.” In other cases, however, the biller automatically pulls the funds from your account when your bill is due.
It’s super important to make sure you have the funds available in your bank account when you’re setting up ACH transfers. Otherwise, you might be hit with a hefty overdraft fee.
What are the benefits of ACH payments?
There’s a reason the ACH Network processes billions of payments annually:
- You get paid faster: With direct deposit, your hard-earned salary is in your bank account on payday. No more waiting for a check to clear.
- You can automate bill payments: Thanks to ACH transfers, you can set and forget your bill payments. No more keeping an eye out for bills, late fees, or missed payments. When the bill is due, the biller will automatically withdraw the money from your account.
- You don’t spend money: Most ACH transfers, including direct deposits from your employer and bill payments, are typically free.
- You go green: ACH transfers are electronic, so you’re not wasting paper, ink, or fuel on mailing checks.
- You can rest easy: Not only are you minimizing paper records that carry your bank account information, but you also don’t have to worry about your check arriving late or getting lost or stolen in the mail.
Are there disadvantages to ACH payments?
There are a few things you should keep in mind about ACH transfers. The biggest one is that businesses have direct access to your bank account — and automatic payments are going to be taken out of your checking account whether you have the funds in your account or not.
If your checking account is often in flux, you might prefer a different way to pay or look for a bank that doesn’t have overdraft fees.
Also, some banks charge a fee for sending money between accounts that you have at different banks, but most ACH transfers are free. If there is a fee for ACH credit transfers, it’s usually less than $5. But compared to a wire transfer, which can cost up to $50, ACH transfers are much more cost-efficient.
When it comes down to it, ACH payments can be an easy way to send and receive money. Just make sure you’re clear on your bank’s policies for ACH direct deposits and direct payments.
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