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: Pitfalls with 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 the direct debit payment and the merchant does not agree. Once the direct debit has been cancelled you should still pay any amount you agree you owe.

How to cancel a direct debit to a credit card

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 Merchant 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 Financial Institution Cancelling a Direct Debit on a Credit Card . 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 and another amount is debited?

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. See Sample Letter: To a Financial Institution Complaining about a Direct Debit (on a Credit Card Account) not being Cancelled .

Step 2: If the financial institution does not resolve the complaint within 7 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. The relevant schemes are:

• Banking and Financial Services Ombudsman (Phone 1800 337 444). Also see Fact Sheet: Have a dispute you can't resolve with your credit provider?
• Credit Union Dispute Resolution Centre (Phone 1300 780808). Also see Fact Sheet: Have a dispute you can't resolve with your credit provider?
• Financial Co-operative Dispute Resolution Scheme Ph 1300 139 220 or visit www.fcdrs.org.au for some credit unions and building societies. If the consumer's financial institution is not a member of an external dispute resolution scheme, the consumer may be able to make a complaint to the Consumer, Trader & Tenancy Tribunal (Phone: 1300 135 399 or visit www.cttt.nsw.gov.au). Seek legal advice on how to do this.

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.

If you are unsure which scheme your financial institution belongs to, ask the complaints staff. The schemes above will also usually be able to point you in the right direction.