Ins and outs of direct debits

More and more merchants offer incentives if you pay via direct debit. We tell you how to avoid the pitfalls.
 
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01 .Ins and outs of direct debit

Credit card

A direct debit is an arrangement with a third party to withdraw money directly from your account or credit card. They can be used for fixed monthly payments (health or car insurance) or variable amounts (electricity or telephone bills).

For variable amounts, you'll usually get a bill indicating the amount and date. If the direct debit is from your bank account, your bank may charge you a fee.

Please note: this information was current as of April 2007 but is still a useful guide to today's market.


Potential pitfalls

A direct debit is a transfer of control to a third party so it's important to read the agreement carefully before you sign it and check the following:

Do you trust the merchant or service provider? Trying to remedy incorrect debits can be time-consuming. There's always the possibility of unauthorised amounts being transferred from your account by unscrupulous merchants.

Is the bill for a fixed or a variable amount? A direct debit is best suited for a regular fixed amount as this makes it easy to budget. If it's for a variable amount make sure you get the bill first, to check how much you'll have to pay. Ask the merchant whether the direct debit can be capped at a maximum amount.

When will you pay? Ask the merchant whether you can be debited at a fixed date and choose a date after you're paid to ensure you have sufficient funds in your account. If the direct debit bounces, your financial institution and the merchant could hit you with a dishonour fee. Or the bank might choose to honour the direct debit but charge an overdrawing fee and default interest.

 
 

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02.Cancelling a direct debit

 

How do you go about cancelling a bank account direct debit?

You can cancel a direct debit linked to a normal account by giving your financial institution and/or the merchant a letter (better to let both know).

  • Put the cancellation request in writing and keep a copy of the request.
  • If you cancel through the merchant, it may take several days to come into effect.
  • If you cancel through your financial institution, it might work out simpler and quicker as it probably can be done using a special form. You might be told you have to do it through the merchant but you're entitled to cancel through your bank (you might be charged a fee).

What if the direct debit is from your credit card?

 Cancelling a direct debit on your credit card account is more difficult.

  • Cancel in writing with the merchant and give a copy to your financial institution.
  • If the merchant fails to act on the cancellation request, you can dispute all subsequent charges with your financial institution.

Usually the financial institution will give you a "chargeback" while it investigates (the amount is credited back to your account). If it finds in your favour, no further action will be taken. If it finds in favour of the merchant, the original direct debit amount will be deducted from your account.

Dealing with disputes

If you're not satisfied with the actions of your financial institution, complain to its head office. If that doesn't work, an external dispute resolution scheme may be able to help:

  • Banking and Financial Services Ombudsman (BFSO), phone 1300 78 08 08, www.bfso.org.au
  • Credit Union Dispute Resolution Centre (CUDRC), phone 1300 78 08 08, www.cudrc.com.au.