Financial Rights Legal Centre
Hotline
Call our National Debt Helpline
on 1800 007 007.
Direct Debits from Credit Cards (factsheet)

This fact sheet is for information only. It is recommended that you get legal advice about your situation.

Download our printer friendly version here (PDF): Direct Debts – Credit Cards

CASE STUDY

Fran paid her monthly health insurance premiums with TOP HEALTH by direct debit from her credit card. Fran decided to change her health insurance to another company. Fran rang TOP HEALTH and cancelled the insurance. Next month Fran received her credit card statement and noticed that another payment had been debited from her credit card to pay TOP HEALTH. Fran rang TOP HEALTH and again asked them to cancel the policy and refund the money. TOP HEALTH said they would cancel the policy and refund the money.

A month later, Fran received another credit card statement and again her credit card had been debited to pay TOP HEALTH. Fran went to her bank and repaid her credit card account, cut up her card and closed the account. Despite this, Fran’s credit card was debited again by TOP HEALTH the next month and Fran received a statement in relation to the amount owing on her closed account.

This is not a rare occurrence when it comes to direct debits on credit cards. Unfortunately, although there are advantages to using direct debits from credit cards there are also pitfalls. This fact sheet tells you how to avoid the pitfalls and what to do 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 (credit card) account on a regular basis to pay for goods and services. You can also make direct debit payments from your cheque or savings account. For more information see Fact Sheet: Direct Debits from Cheque/Savings Accounts.

HOW DOES A DIRECT DEBIT WORK?

  1. You agree to pay by direct debit for goods or services, for example, your electricity bills or gym membership
  2. You sign an agreement which authorises the merchant to deduct payments from your credit card account by direct debit
  3. Money will be taken from your account until you cancel the Direct Debit.
  4. 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 FROM MY CREDIT CARD?

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 from your credit card for you.

The disadvantages are:

  • You can easily get overcommitted when you are paying for goods and services by credit card. Make sure you can afford the goods and services before you agree to pay for them. Remember, if you can’t pay off your credit card debt you will end up paying interest on those goods or services you are paying for by direct debit also.
  • You have to watch the limit on your credit card account to make sure there are sufficient available funds in the credit card account to cover the amount being deducted. Although the financial institution will usually let you exceed your limit and process the direct debit you need to be aware that any amount over your limit is usually due and payable (on top of the minimum payment) on the next payment date.
  • It can be very costly for you if the direct debit to your credit card is refused by your financial institution. The merchant may charge you a dishonour fee.
  • It is more difficult to dispute a payment after the payment has already been taken from your account by direct debit.
  • It can be difficult to stop direct debit payments from your credit card. Although see below on how to stop direct debit payments.

CANCELLING A DIRECT DEBIT

You can cancel a direct debit whenever you want. You do not need a reason. To cancel a direct debit on your credit card you must write a letter to the merchant and send a copy of that letter to your financial institution.

Important:

  1. 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.

  2. 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

STEP 1

Write a letter to the merchant stating that you are cancelling the direct debit. Keep a copy of the letter as evidence that you have cancelled the direct debit.  A sample letter for you to use is available at Sample Letter: To Business Cancelling a Direct Debit Authority.

STEP 2

Write a letter to your bank/financial institution saying that you have cancelled the direct debit to your credit card. This letter should be addressed to the Card Services Area of the bank/financial institution and should enclose a copy of the letter to the merchant.  A sample letter for you to use is: Sample Letter: To a Bank Cancelling a Direct Debit Authority. Keep a copy of the letter for your records.

STEP 3

A few days later you should ring the merchant and check that the direct debit has been cancelled.

WHAT DO I DO IF THE DIRECT DEBIT IS NOT CANCELLED?

STEP 1: Write a letter of complaint to the financial institution immediately (preferably before the due date for payment or 30 days from the date of the statement). 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 an external dispute resolution scheme. 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?

LISTING SERVICE

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:

  1. direct debit arrangements;
  2. direct credit arrangements; and
  3. periodical payments.

PAY ANYONE

Your bank must also provide instructions to help you identify your own internet “pay anyone” payments.

TIMING               

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 SCHEMES ARE:

  • Financial Ombudsman Services Australia (Phone 1800 367 287).
  • Credit and Investments Ombudsman (Phone 1800 138 422); OR
  • 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:February 2017