A direct debit is an automatic transaction that transfers money from your account to another.

Direct debits are handy for paying regular bills, such as your monthly phone bill or gym membership. Automatic payment means you don't have to remember to pay the bill, and you don't risk any late fees.

However, direct debits can become a problem if:

• You don't have enough money in your account.
• The service provider is untrustworthy.
• You don't know how to cancel the payments when you need to.

Setting up a direct debit

To set up a direct debit, you arrange a direct debit authority. This allows a service provider to withdraw money from your account.

Providers may specify direct debit payments as a condition of signing up for a product or service.

You can set up a direct debit to withdraw money from your bank account, or set up a recurring payment from your credit card.

The amount can be fixed or variable, and can come out at set dates or at regular intervals. For example, you could set up a direct debit with:

• your real estate agent to pay your rent on the first day of every month
• your electricity provider to pay your bill from your credit card every 3 months

Fixed amounts on fixed dates are the easiest to manage. You know exactly what to expect and when.

If your direct debit is for a variable amount, check the bill first so you know:

• You have enough in your bank account.
• The service provider deducts the correct amount.

If you don't have enough money in your account, you could be charged a dishonour or overdraft fee by your bank and the service provider.

Cancelling a direct debit

To cancel a direct debit, you usually need to contact your bank and the service provider.

Stopping direct debits from your bank account

To cancel a direct debit from your bank account, contact your bank:

• tell them when you want to stop the payments
• ask them for a letter confirming your request

Once the bank receives your request, they have to:

• stop the payments
• forward your cancellation to the service provider's bank

It's a good idea to write or email the service provider as well, but you don't have to.

Keep copies of any letters or emails you send.

Stopping recurring payments from your credit card

To cancel a recurring payment from your credit card you have to contact your service provider, then your bank.

If direct debit is a contract or service condition

If it's a condition of service to pay by direct debit, consider getting legal advice before you cancel. If you still owe money for a service, you'll need to negotiate an alternative payment method.

Sample letters for cancelling a direct debit

The Financial Rights Legal Centre has sample letters you can use to cancel a direct debit. Fill in the details online to create the letter:

• letter to bank
• letter to business

Problems with direct debits

Before you set up a direct debit, make sure you trust the service provider. You are giving them permission to withdraw money from your account.

Check your accounts regularly to make sure the provider is taking out the agreed amount of money.

If you find an incorrect or unauthorised transaction, contact your bank as soon as possible.

To find out what direct debits or recurring payments you have, ask your bank for a list.

If your bank doesn't cancel your direct debit when you ask, you can make a complaint. If your account is debited after you've asked your bank to cancel your direct debit, your bank can't charge you overdraft fees to cover the debit.

Other automatic payment options

For some services, you can set up an automatic payment through your online banking instead of a direct debit. For example, through PayPal. The provider still controls the debit, but you can start, stop or change the automatic payment yourself.

If a business offers you a discount for direct debits, ask if they'll offer the same for other automatic payments.

Make sure paying by direct debit is right for you. If you're not offered alternative ways to pay, shop around for another service provider.