If you're always forgetting to pay your bills on time, direct debits could make things a lot simpler.
Setting up automatic payments can put an end to late fees and nasty final notice letters. But it's not without its drawbacks and risks.
What is a direct debit?
A direct debit is a deal with a third party that lets it withdraw money directly from your bank account or credit card.
Direct debits can be used for fixed or variable amounts, and are often used for recurring payments such as:
- insurance premiums
- mortgage repayments
- subscriptions (e.g. Netflix, Stan, Spotify)
- mobile phone and internet bills
- utility bills.
Some companies may make direct debit payments a condition of signing up to their product or service.
Direct debits can save you time and money, but read the agreement carefully before signing.
What are the pros?
A direct debit can be a useful way to manage your payments, particularly if you're forgetful or very busy.
It lowers the risk of late payments and, because it's automated, can save you time and hassle.
Some utilities and organisations also offer discounts if you pay by direct debit.
What are the cons?
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. Otherwise it's like signing a blank cheque.
Before setting up a direct debit, you should consider the following:
Do you trust the merchant or service provider?
There's always the possibility that unscrupulous merchants could take unauthorised amounts from your bank account. If this happens, getting your money back can be a headache.
Is the bill for a fixed or a variable amount?
A direct debit is best suited to a regular fixed amount, as this makes it easy to budget for.
If you're on a low income, paying variable amounts by direct debit can be risky because you may not have enough money in your account – particularly if your bill is higher than normal (for example, if you're working from home and getting through more electricity, water and internet data than usual).
Find out whether you can pay by another method. If the provider says no, make sure you get the bill first to check how much you'll have to pay. You can also ask the provider whether it can cap the direct debit at a maximum amount.
When will you pay?
Ask the merchant whether you can be debited shortly after you've been paid to ensure you have enough money in the account.
Once set up, a direct debit will take money from your account until you cancel it
If the merchant isn't willing to change the payment date, ask if you can pay by another method, such as BPAY or a regular electronic transfer from your account. You may have to pay an extra fee, but it could be worth it to have control over when you pay the bill.
If this isn't possible, you'll need to pay attention to how much money is going in and out of your account, or there's a risk your direct debit will bounce. You might find it useful to keep track of your expenditure with a budgeting app.
What happens when a 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 you an overdrawing fee and default interest.
How to set up a direct debit
The process can vary from merchant to merchant. But generally you'll need to give them details of your bank account (e.g. BSB, account number and name) or credit card (e.g. card number, name, expiry date and CVV).
Once it's been set up, the direct debit will take money from your account until you cancel it.
How to transfer your direct debit to another account
Go through your statements and make a list of all the recurring payments you've set up. (This is also a good time to deal with unwanted subscriptions and memberships – aka 'subscription creep' – and to consider cancelling any direct debits you no longer need.)
Contact each merchant and ask them to update your billing account with your new details. Try to do this well in advance of the next payment date to make sure there are no processing delays. Otherwise, you may need to make a one-off payment.
Check your recent transactions on your new account. If the payment hasn't come out when it's supposed to, contact the merchant.
How to cancel a direct debit
From a bank account
You can cancel a direct debit linked to your bank account by contacting the financial institution and/or the merchant – it's a good idea to let both know.
Some banks let you cancel by phone, others ask that you fill out a form or visit a branch. It's best to cancel the direct debit in writing and keep a copy.
If the bank charges a fee, try to cancel with the merchant first. Refer to the Code of Banking Practice if necessary. Credit unions and building societies have similar provisions in their Mutual Banking Code.
From a credit or debit card
To cancel a direct debit from your credit or debit card, you'll need to notify both the biller and your bank.
If the merchant fails to carry out your cancellation request, you can dispute all subsequent charges with your financial institution.
Carefully check your statements and contact your bank for a chargeback if the direct debits continue. Do this urgently, as there are time limits for chargebacks.
If you have any problems, contact the Australian Financial Complaints Authority (AFCA).
Stock images: Getty, unless otherwise stated.