How Online Bill Paying Works

Setting up online bill paying is usually a straightforward process. If you decide to pay bills through your bank (more about the other choices you have on the next page), just go to its Web site and register. Then enter the pertinent information about the bills that need paying, which account you'd like the money to come out of and whether you'd like to set up automatic payments or take care of matters yourself each month. Typically you're then good to go.

Apart from just receiving and paying bills, with online banking you can also accomplish tasks like keeping track of your transactions, setting up money transfers and seeing images of cancelled checks. You can often sign up to receive e-mail alerts that deliver different notifications in the case of low funds or unusual activity. Some Web sites also offer budgeting tools, while others are compatible with financial planning software like Quicken.

Some of these activities may carry a fee depending on who you're dealing with. Be sure you know your bank's policy or a surprise fee could push you into the red and earn you an additional overdraft fee for your troubles. Also, in regard to online bill paying in particular, it's a good idea to make sure your money gets where it needs to go each month -- even if you've set up recurring payments -- because sometimes a company can change part of its billing information and your bank won't be able to deliver the funds.

Now that we've covered what online bill paying and banking have to offer, we'll delve into how the online experience differs from traditional banking, and how they stack up against each other in terms of security.

There are three main routes you can take to pay your bills online. You can pay them directly through your bank; you can pay them through the Web site of the payee (your utility provider, for example, or you credit card company); or you can use a third-party Web site to manage your payments.

Third-party sites such as MyCheckFree and Paytrust, allow customers to centralize their online bill paying in one place, coordinating them to help ensure all the bills are paid on time. The cost ranges from a monthly charge and transaction fees to nothing at all.

You can also decide whether you want to start using an online-only bank, which tend to offer better interest rates. If you do decide to go the online-only route, make sure the bank you choose is insured by the Federal Deposit Insurance Corporation (FDIC). It should say either "FDIC-insured" or "Member FDIC" very clearly on the Web site. For online bill paying, you'll want to keep an eye out for a little padlock icon that signifies a Web site is protected. Give it a click and some certification information should pop up; read it carefully.

In some ways, online bill paying is actually safer than other methods. People who pay their bills online can keep better track of their account activity, so they know right away if anything is amiss. They can also receive their statements and other financial notices through e-mail, so there's no chance someone can steal them straight out of their mailboxes or trashcans.

When paying bills online, just make sure you protect your personal data. For more about banking, visit the links on the next page.