Find out what a direct debit is, how you can set one up on your credit card account, the pros and cons, and how to cancel.
Direct debits are amounts that you authorise to be taken from your bank or credit card account on a regular basis to pay for a service or goods. This might include your telephone bill or a gym membership. The amount may be fixed or variable, as with a telephone bill, and it may be deducted on exactly the same day every month, around the same day, or on a weekly or fortnightly basis. In other words, direct debits can be set up to exactly suit your requirements and the demands of the merchant or service you are paying.
Before we go deeper into the features of direct debit payments you need to understand how they work. To learn about the pitfalls of direct debit from credit cards, please read this our brief guide.
What exactly is direct debit?
When a merchant (where you buy goods or services) is allowed by you to automatically debit (bill) the purchases made by you to your credit card, cheque or savings account, then this is called a direct debit payment.
The reason we choose direct debit is most often for convenience purposes. We won't have to remember payment dates and therefore never miss out on them. Here is how it works:
- Regular subscription. You have a regular subscription to a service or goods delivered to you such as your phone bill, your electricity bill or a membership. To set up a direct debit payment you have to give the issuer permission to charge the amount each month to your credit card on autopilot.
- Agreement with issuer. To do this you need to sign an agreement (a contract) with the issuer.
- Bill to be taken from account. On the arranged date and frequency your bill will be taken from your account or in this instance, charged to your credit card until you decide to cancel the contract.
- Variable or fixed. The direct debit can either be variable or fixed, and the terms are flexible, meaning the bill can be charged weekly, fortnightly, monthly, etc.
When to choose direct debit from credit cards
Depending on your personal situation this can or cannot be a good solution for you. As a plus, direct debits on credit cards are good for people who:
- Don't want to waste time or worry with having to pay bills by a due date. Since the process is automated, it will be out of your mind so that you can concentrate on other - more important things.
But since there are pitfalls to using direct debit with credit cards you need to know about them:
- Over-committed. One of them is the danger of getting over-committed, also called carried away when shopping. Before you sign another direct debit agreement check to make sure you can actually afford it too.
- Limit restrictions. Credit card limit restrictions can also work against you. Especially if you use your card for all the purchases you make to take advantage of bonuses such as rewards points credit cards.
- Disputes. Disputes can be annoying and difficult after the direct debit has been made to your account.
- Stopping direct debit payments. Sometimes it is very difficult to stop these direct debit payments made to your account, even if you do the right thing upfront as seen at the beginning of this article. Read on how you can protect against this eventuality.
- Dishonour fee. If the direct debit is refused by your card lender you might have to pay a dishonour fee.
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Credit card direct debits pros and cons
- The advantage of putting direct debits on your credit card is that you know they will be paid each month on time.
- You will also be able to take advantage of your credit card's interest-free days, and you should feel assured that your credit limit is sufficient to always cover the amount.
- Direct debits on a bank account without an overdraft facility can lead to problems if you have not planned your finances properly that month and your account is short.
- The disadvantage of direct debits on a credit card is similar to the last point about bank accounts: you must make sure that your credit limit can accommodate the direct debit each month, which will involve you paying close attention to your other credit card spending so you don't overdo it.
- Direct debits that are refused for any reason can trigger a dishonour fee on your account.
- Direct debits make it harder to query problem bills, because the money has already been taken.
When to cancel direct debit payments
- You should definitely cancel a debit card with your merchant if you have cancelled your agreement for whatever reasons.
- Alternatively, if you opt to switch from direct debit to cheque payments, BPay, or else then also cancel your agreement.
- In case of disputes with the merchant. You will have to pay the outstanding amount though, there is no way around this.
How to effectively cancel a direct debit on your credit card
It is entirely your choice to cancel a direct debit and you do not have to explain why you are doing so. All you need to do is send a letter to the merchant concerned, and copy in your credit card or bank. However, bear in mind that cancelling a direct debit may not end your liability to the merchant if an amount is outstanding or you have entered into a contract that still has some time left to run. You must be especially careful when a contract states that payment must be made by direct debit, and you have signed your agreement to this. If you are in dispute with a merchant, then you may have no choice but to cancel your direct debit to prevent any further damage being done to your account.
- If you cancel the direct debit payment you are still legally bound to pay the merchant for services and goods already provided to you.
- If your contract with the merchant stipulates that payment has to be made with direct debit, you are advised to speak with a solicitor BEFORE cancelling your direct debit.
Step by step instructions on how to cancel the direct debit from a credit card
- Write a letter of cancellation to your merchant and keep a copy yourself. It would be advisable to send this letter with registered mail.
- Write a letter to your bank, or financial institution stating that you have cancelled the direct debit to your credit card. Address the letter to the Card Services Area of the financial institution and enclose a copy of the letter you sent to the merchant. Keep a copy for yourself.
- Wait a few days, then ring the merchant and check whether the direct debit has indeed be cancelled.
Once you have cancelled your direct debit, make sure you receive a confirmation from your credit card issuer. You could also try calling your credit card issuer a few days later to check that the direct debit is indeed showing as cancelled.
Action steps for when the direct debit is not cancelled and another amount is debited?
- Send a letter of complaint to your bank immediately. If possible before the due date for payment, or 30 days from the date of the statement. If the debit transaction has been made unauthorised, (after you've made the official cancellation, you should demand that all amounts debited to you after the cancellation be credited to your account (prepaid, including fees lost or interest accumulated.
- If the complaint is not resolved within 7 days of receiving the complaint letter by your bank find an external dispute resolution issuer. Attach all proof of correspondence, e.g. your letters (keep copies.)
The good thing about direct debit arrangements is that you can cancel them any time. To do so you first need to write a letter and send it to the merchant. Plus a copy of said letter also needs to be send to your bank or financial institution.
- Credit Union Dispute Resolution Centre (Phone 1300 780808.)
- Banking and Financial Services Ombudsman (Phone 1800 337 444.)
- Financial Co-operative Dispute Resolution Scheme (Phone 1300 139 220.)
- Visit www.fcdrs.org.au for some building societies and credit unions. If your financial institution is not a member of an external dispute resolution scheme, you may be able to make a complaint to the Consumer, Trader & Tenancy Tribunal (Phone: 1300 135 399 or visit www.nsw.gov.au). Seek legal advice on how to do this.
Because of applicable time limits you should always lodge your complaint as soon as you hit the wall in your negotiations. Pitfalls with direct debit from credit cards mustn't become a nightmare to you.