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
Pros
- 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.
Cons
- 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.
Sample letter for cancelling a direct debit payment
Resolution schemes
- 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.
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Hi! 3yrs back I set-up a direct debit for a service. Though I attended the service, I was never really happy with the service and don’t really want to pay for it. The company also stopped contacting me regards to this matter.
Even though, the company is a 1 person operated (pretty small) and also because I don’t wish to pay for it. Can they still affect me in any negative ways?
John.
Hi John,
Thanks for your question.
All your credit applications, payment defaults, credit enquiries, payment histories and even bankruptcy information are all listed on your credit file. So, if you have not paid your debts for whatsoever reason, it will be recorded on that file and that may have a negative effect on your rating.
Usually, when you apply for any form of credit, the creditor will conduct an enquiry of your file. Whatever information they find from your file will most likely be considered in their decision whether to approve your application or not.
If you wish to check your credit file, you have the option of signing up for a credit monitoring service or buying a one-off credit report.
Cheers,
May
Are direct debits on credit cards considered purchases or cash advances for the purpose of interest charges?
Hi Lourie, thanks for your inquiry!
Generally direct debits are associated with bill payments and recurring cash advance transactions. The quickest method to determine whether your direct debit transaction is a purchase is to contact the merchant directly.
Cheers,
Jonathan
I would like to set up a direct debit for a credit card as we will have a large amount of spending for the next six months but these payments may put us into credit on the card. Is this allowed?
Hi Trevhse,
Thanks for your inquiry,
Direct debit payments via a credit card are possible if the merchant supports direct debit facility. Depending on the credit card lender the interest rate will vary for the direct debit transaction.
I hope this helps,
Jonathan
I have been on the phone and have spoke to 8 different people from St George this week regarding the interest charges on my vertigo mastercard. Every single one of them said that I will be paying interest if I have not paid the closing balance. This is not what I was told when signing up for the card, and it is not what is stipulated on your website. I always make the minimum payment, going over it by about $300 per fortnight. I don’t know if the interest charges are from my gym membership which has been coming out of the credit card. I was never warned about this type of transaction and the fees that it would accrue.
Furthermore, I have not received any phone calls from St George to say what the charges are from, which I would expect if it is a $22 membership, which I get charged $27 extra for. Not one of the customer service representatives could give me helpful information. I have their names, and I know which departments they work in if this is of any help.
What should I do?
Hi Kate,
Thanks for your question.
Interest will be applied on your St.George Vertigo card unless you pay the closing balance in full each statement period. If you’re unsure which transactions are costing you interest, it can help to take a look at your most recent statement and see the interest charges that are applied to your account. Any purchases you make will have the purchase rate of interest applied, while cash advances (which St.George defines as withdrawing cash using your card or transferring to and from other accounts you have with St.George) will have the cash advance rate applied.
As for the $27 additional charge, this is something that you will need to sort out with St.George. You might want to take a look at this page that details the process of revolving disputes with your card issuer.
I hope this has helped.
Thanks,
Elizabeth
Hi, I have just switched bank accounts which seemed to go ok …until now. I received a default letter from my credit card saying I was in arrears and missed my payment. When I called they said I cancelled it on a given date and advised me to contact my bank, which I did and they say the switch was ok and the direct debit is showing as live on their system. Who is at fault to reclaim costs from and how do I prove this as I have made several phone calls and they both say it isn’t their fault. Surely I must be able to get proof somewhere, after looking at my bank account it does show as active on the screen ???? Confused! Please help or advice :)
Hi Jjaymags,
Thanks for your question.
You might want to call your credit card issuer to confirm what the problem is. If you’ve set up direct debit with your credit card, it could be that the numbers on the form were incorrect.
Your credit card issuer should be able to provide a course of action; alternatively you could contact the Financial Services Ombudsman as both banks seem like they are unable to help.
Cheers,
Shirley
I’ve changed banks recently. I’m in the process of changing all my direct debits to new bank. Is it worth having DD from my credit card account? Mainly to earn more points? Phone, power, water, gas etc etc etc.
Kind regards
Wozz
Hi Wozz.
This depends on whether you want to earn points. If you’re paying the bills on your credit card, then you may as well get rewarded when you spend. You can find out more about paying bills and earning points on this page.
Thanks for your question.
If say, an insurance company debits visa credit card monthly, lets say, 20th of the month, do they put a bar/restriction for that amount a few working days before? to ensure they get their funds? Just wonder since sometimesI have no reason for a debit balance, but know there is a bill due in next few days.
Thanks.
Hi Natalie. Thanks for your question. Yes, some merchants do this, it depends on how the merchant bills your account. Jacob.