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Dangers of direct debits

Are things coming out of your accounts that shouldn’t? Have you forgotten what you are paying automatically? It’s time you had a good hard look at your direct debits.

  

Direct debits: they can be a great idea if you want a no-fuss way of paying bills or regular subscriptions or memberships. Or perhaps you’re being offered a discount or cheaper rate by a business if you agree to pay by direct debit.

But once you’ve signed on the dotted line, they can be easy to set and forget. Here’s why you might want to keep a sharp eye on your direct debit arrangements.

They can become problematic if you don’t have enough money in your account or a limit on your credit card when the payment hits. Then you can wind up being charged a dishonour or overdraft fee by both your financial institution and the service provider.

As with any electronic payment, mistakes can happen. You still need to be vigilant about checking your bank account or credit card statements to ensure you are being charged correctly.

It can also add an extra layer of complication to your financial arrangements when you decide to cancel a direct debit arrangement.

Doing direct debit right

The Australian Securities and Investments Commission’s Moneysmart website has some advice for people about direct debit arrangements.

For starters, it suggests you should only enter into direct debit arrangements with a service provider you trust and when you know how to cancel the arrangement if you no longer need it.

If you’re being lured into a direct debit by the promise of a discount or lower rate, it suggests checking if you’re eligible for the same discount if you set up an automatic payment via online banking.

The difference is an automatic payment lets you stay in control of when the payment starts, stops or changes.

Often it’s only when someone wants to cancel a direct debit that they find out how much work is involved.

Get it in writing

If the direct debit comes out of your bank account you need to notify your financial institution in writing. The letter should specify the date you would like your direct debit to be cancelled and ask for a letter from your financial institution confirming your request.

When your financial institution has received your letter it is obliged to make sure no more payments are debited from your account. It must also forward your request to the service provider’s financial institution.

It is also a good idea to notify the direct debit service provider in writing.

If the direct debit is linked to a credit card you need to write to both your financial institution and the merchant to stop it.

But cancelling a direct debit isn’t necessarily the end of your liability to the merchant if there is still an amount outstanding or you entered into a contract for an agreed term.

If you have requested the cancellation of a direct debit, make sure you keep an eye on your bank or credit card statements to ensure you are not charged incorrectly.

If your account is debited after you request the cancellation of a direct debit, your financial institution cannot charge you overdraft fees.