This fact sheet is for information only. It is recommended that you get legal advice about your situation.
Jarrod had a mobile phone account with AUSSIE PHONES. As part of his agreement with AUSSIE PHONES he agreed to pay his mobile phone bills by “direct debit” from his savings account with BIG BANK. One day Jarrod was offered an unbelievable deal by BIG TELCO, another phone company. Jarrod decided to cancel his agreement with AUSSIE PHONES. He rang them and they agreed to cancel his account.
Jarrod then remembered the direct debit. He went to BIG BANK to tell them to cancel the direct debit. The teller at BIG BANK told Jarrod he could not cancel the direct debit with the bank, he would have to contact AUSSIE PHONES. Jarrod went back to AUSSIE PHONES and told them to make sure they cancelled the direct debit. They said it was cancelled and confirmed that he did not owe them any more money. Jarrod then signed up with BIG TELCO.
A month later Jarrod went to the ATM to get some money out and found there was no money in his account. He contacted BIG BANK who told him that a further payment to AUSSIE PHONES had been deducted from his account.
This is a very typical story when it comes to direct debits. Although there are advantages to using direct debits, there are also pitfalls. This fact sheet tells you how to avoid the pitfalls and how to complain if you have a problem.
WHAT IS A DIRECT DEBIT?
A direct debit is when you allow a merchant (the business providing the goods or services to you) to debit (take money from) your (savings/cheque) account on a regular basis to pay for goods and services. Payments by credit card can also be made by direct debit. For more information see Fact Sheet: Direct Debits from Credit Cards. This fact sheet deals only with direct debit from your cheque or savings account.
HOW DOES A DIRECT DEBIT WORK?
- You agree to pay by direct debit for goods or services, for example, your electricity bills or gym membership.
- You sign an agreement called a Direct Debit Request (DDR). This form tells your bank to deduct money from your account to pay the merchant for the goods or services you are getting. The merchant cannot deduct money from your account without a signed Direct Debit Request.
- Money will be taken from your account until you cancel the Direct Debit.
There are different types of direct debits. The amount can be:
- Fixed – for example, $100 per month to repay your personal loan OR variable – for example, your phone bill each month
- On the same date each month (for example, 5th of each month) or weekly/fortnightly or monthly.
SHOULD I USE DIRECT DEBITS?
This will depend on your situation.
The advantages are:
- You do not have to worry about running around and paying bills by their due date. With a direct debit the merchant and bank organise the deduction of the amount due (from your account) for you.
The disadvantages are:
- You have to watch the balance of your account to make sure there is enough money to cover the amount being deducted. This is particularly difficult when the amount being deducted varies (for example, your electricity or phone bill). If you have trouble doing this then you should consider other payment options.
- It can be very costly for you if you do not have enough money in your account to cover a direct debit. You may be charged a dishonour fee by the bank and possibly another dishonour fee by the merchant. The bank may also choose to process the direct debit anyway and overdraw your account. Then the bank may charge you a fee for overdrawing your account and interest.
- You should also check your account statements to make sure the amount debited from your account is correct (or in fact being paid at all). The sooner you notice and raise a problem, the better chance you have of fixing it.
- It is more difficult to dispute a payment after the payment has already been taken from your account by direct debit. Generally, it is more difficult to negotiate a dispute when you have already paid for the services you are disputing.
- It can be difficult to stop direct debit payments. Although see below on how to stop direct debit payments quickly and effectively.
CANCELLING A DIRECT DEBIT
You can cancel a direct debit whenever you want. You do not need a reason. To stop a direct debit you should write a letter to your financial institution and the merchant. See below for details.
Even if you stop the direct debit you may still owe money to the merchant for goods and services provided. You may need to negotiate a new payment method.
If your contract with the merchant states that it is a condition you pay by direct debit you should get legal advice before stopping the direct debit.
You should cancel your direct debit when:
- You have cancelled your agreement with the merchant for any reason
- You wish to change your payment method – for example, from direct debit to payment by BPay, cheque or other.
- You are in dispute with the merchant as to the amount of a bill or the quality of the goods or service. Once the direct debit has been cancelled you should still pay any amount you agree you owe.
HOW TO CANCEL A DIRECT DEBIT
Write a letter to your bank/financial institution saying that you are cancelling the direct debit. Address the letter to the branch where you opened your account. A sample letter for you to use is available at Sample Letter: To Bank Cancelling a Direct Debit Authority. Keep a copy of the letter as evidence that you cancelled the direct debit.
Write a letter to the merchant stating that you have cancelled the direct debit. Keep a copy of the letter. A sample letter for you to use is available at Sample Letter: To Business Cancelling a Direct Debit Authority.
Both Step 1 and Step 2 should be done at the same time. If you cannot locate the merchant, (sometimes a problem with goods or services ordered over the phone or Internet), you should proceed with step one regardless.
Ring the financial institution to check that the direct debit has been cancelled a few days after you send the letter.
WHAT DO I DO IF THE DIRECT DEBIT IS NOT CANCELLED?
STEP 1: Write a letter of complaint to the financial institution. If the debit is unauthorised, (that is made after you had cancelled the direct debit), then you should ask that any amounts debited after the cancellation be credited to your account (paid back) along with any fees or interest that should not have been charged.
STEP 2: If the financial institution does not resolve the complaint within 45 days (of receiving the letter), you should make a complaint to the external dispute resolution scheme (see below). The details of the complaint should be the same as in the letter of complaint to the financial institution. You should attach a copy of the letter you sent to the financial institution and copies/description of any response you have received.
HOW CAN I GET A LIST OF ALL OF MY DIRECT DEBITS?
Write a letter to your financial institution asking them for a Listing Service. They should be able to give you lists of the following for the previous 13 months:
- direct debit arrangements;
- direct credit arrangements; and
- periodical payments.
Your bank must also provide instructions to help you identify your own internet “pay anyone” payments.
The lists and information should be issued to you as soon as practicable, and no later than 5 days after the request. This information is important to get from your bank if you are thinking about switching to another bank.
THE RELEVANT DISPUTE RESOLUTION SCHEME IS:
- Australian Financial Complaints Authority (Ph: 1800 931 678, afca.org.au).
- See Fact Sheet: Dispute Resolution
You should always lodge your complaint as soon as it is clear that you cannot resolve your dispute with your financial institution as time limits apply to your right to complain.
NEED SOME MORE HELP?
See Fact Sheet: Getting Help for a list of additional resources.
Last updated: October 2018