Direct debits – how to make them work for you
Have you ever set up a direct debit from your account?
Do you know how it works and what to do when you want to cancel it?
If you have a problem with your direct debit do you know whether to go to your bank or the merchant?
Direct debits can be an efficient and convenient way for you to make payments. You can set up a direct debit to pay for a wide variety of services including insurance, telephone, gas and electricity. To make sure that you manage your direct debit effectively you will need to understand how a direct debit works and what your rights are.
What is a direct debit?
When you give a direct debit authority to a merchant you are allowing them to directly debit your nominated account in payment for goods or services. The direct debit can be linked to an account with your financial institution (eg bank savings account) or to your credit card. A direct debit linked to a credit card is sometimes called a “recurring transaction” and is governed by the credit card scheme rules.
Tips about credit card fees charged by merchants
How does a direct debit work?
When you set up a direct debit you will enter into an agreement with the merchant. In the case of a direct debit linked to a bank account you will give the merchant a Direct Debit Request. The Direct Debit Request stays with the merchant and is not sent to the bank unless there is a dispute. The merchant is able to participate in the direct debit system because a financial institution has sponsored them into the system. It is on the basis of this sponsorship that your bank will allow the merchant to make debits from your account. A direct debit can:
- be for a fixed or a variable amount; and
- operate at regular intervals or pre-determined dates.
How to use a direct debit
You should carefully read any direct debit agreement before you sign it and make sure you understand the nature of the authority you are giving the merchant. You should also consider the following issues before you give a direct debit authority to a merchant.
The merchant
Do you trust the merchant you are dealing with? Have they offered any alternative methods of payment? Be wary of any organisation that pressures you into giving them a direct debit authority.
Type of payment
A direct debit can be used for a variety of payments but is probably best suited to small to medium payments of a fixed amount. For example many people use a direct debit to pay their insurance premiums on a monthly basis. A fixed amount may be more manageable than a variable amount because it allows you to budget around the direct debit payment.
You may also consider using a direct debit to pay a regular bill that is for a variable amount, for example your telephone or electricity bill. You should think carefully about your usual minimum balance before giving a direct debit authority for unpredictable amounts or amounts that can vary significantly as it may prove difficult to budget around the direct debit payment.
If you are thinking of giving a direct debit authority for a variable amount you should make sure that you will get a bill first so that you will know how much is to be debited. You may also want to ask the merchant whether your authority can be capped at a maximum specified amount.
The timing of the payment
When you set up a direct debit you may be able to choose the date your payments are made. You should ask the merchant to confirm that the payments will be debited on this date. If you can choose the date for your payments you should think about when you get paid or receive a benefit and when you make other payments to make sure that you have enough money to cover the direct debit.
If a direct debit bounces because there are insufficient funds in your account you may be penalised twice. That is, both the merchant and your bank may charge a fee. You should also be aware that in some cases your bank may choose to cover a direct debit and then charge you an overdrawing fee and possibly default interest on the overdrawn amount.
Read your account statements
Just because a direct debit allows your payments to be made automatically it does not mean you should forget about it. It is always a good idea to review your bank or credit card statements to check that the merchant is debiting your account in accordance with your authority.
How do you cancel a direct debit?
You may want to cancel a direct debit because you wish to use a different payment method or because you no longer receive the services provided by the merchant. Your instruction to cancel a direct debit must be in writing. The rules governing direct debits vary in some respects for bank accounts and credit cards. Generally speaking, you should be able to cancel a direct debit with the merchant or your bank.
Cancelling a direct debit linked to a bank account
You can cancel a direct debit that is linked to your bank account with the merchant or with the bank where your account is held. You do not have to go to the merchant before you go to your bank or vice versa.
If you instruct your bank to cancel the direct debit they must make sure that no more payments under the direct debit are debited from your account. Your bank must also forward your cancellation instruction to the merchant’s sponsor financial institution who must then make sure that the merchant cancels your direct debit.
Banks’ obligations regarding direct debits are set out in the 2003 Code of Banking Practice. More information about the Code
Cancelling a direct debit linked to a credit card
You can cancel a credit card direct debit with the merchant or with your bank. Whilst the credit cards scheme rules allow a bank to cancel a direct debit there may be some technical problems that prevent your bank from being able to process your request.
Sample cancellation letters
Here are some sample letters you can use when you want to cancel your direct debit. You should keep a copy of your cancellation letter.
- Sample letter to merchant to cancel direct debit
- Sample letter to financial institution to cancel direct debit
Problems with direct debits?
If you have a problem with a direct debit you can make a complaint to the merchant or your bank. You should read your agreement with the merchant to learn what arrangements they have to resolve complaints. Banks must resolve your complaint within 7 days and they cannot require you to first raise the complaint with the merchant.
If the direct debit is linked to your bank account and the bank resolves that the direct debit is unauthorised then they should recredit your account with the debited amount and any fees or charges incurred as a result of the debit. You will then have to deal with the merchant about any outstanding payment issues.
If you have a complaint about a direct debit linked to a credit card your bank will “chargeback” the direct debit transaction. A chargeback is when the disputed amount is credited to your account while your complaint is being investigated. If the complaint is resolved in your favour then the chargeback remains. If the dispute is resolved in favour of the merchant then the amount is once again debited from your account. You should ask your bank what the arrangements and time frames are for chargebacks on disputed direct debit transactions linked to a credit card.
If you are unhappy with the response you receive from your bank about your direct debit complaint you may be able to take the matter to an external dispute resolution scheme. The relevant schemes are:
- Banking and Financial Services Ombudsman (Ph 1800 337 444 – Toll Free)
- Credit Union Dispute Resolution Centre (Ph 1800 624 241 – Toll Free)
- Financial Co-operative Dispute Resolution Scheme (Ph 1300 139 220 – Local call rate)
Source:fido.asic.gov.au
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