ACH is an acronym for Automated Clearing House, an electronic network used to process bank-to-bank transactions. An ACH credit occurs when funds are deposited electronically into an account. The payer initiates a payment through his or her bank, which then electronically transmits the payment through the ACH to the recipient's bank account. You can receive funds or make payments by ACH credit.
The most common ACH credits are direct deposits, which can include paychecks and government benefits such as Social Security. When you elect to have your IRS or state tax refund directly deposited into your bank account, it's an ACH credit as well because it pushes funds into your bank account.
You also can make payments by ACH credit. For example, business owners in California may use an ACH credit to pay state taxes. You authorize your financial institution to transfer a specified payment amount from your account to the state's account.
An ACH debit
The organization you're dealing with will need your account number and permission to deduct the payment amount each month. Some states also offer the ACH debit option for business owners to pay their taxes, including California and Michigan.
Benefits of ACH Transfers
ACH credits and debits are fast and convenient. You don't have to worry about checks getting lost in the mail or remembering to make a payment each month if your payments are automatically transferred from your bank account. Payments are generally received within 1 to 3 business days. For business owners and individuals, payments using electronic funds transfer through ACH help reduce costs, including printing, postage and check processing fees.
Downsides of ACH Transfers
An ACH transfer requires you to give out your personal banking information to an employer or company, which exposes you to risk if that organization ever has a data breach. If there's a billing error, you may be charged an incorrect amount. Since you aren't making the payments yourself, there's a risk you could forget about the payment and overdraw your account if the funds aren't available.