Direct debits

Automatic bill payments

Direct debits can help you organise your finances. Make sure you understand how they work and what to do if you want to cancel them.

How direct debits work

When you set up a direct debit, you are allowing a service provider, such as your private health insurer or your gym, to automatically withdraw money from your account at set times to pay your bills or make your loan repayments.

Direct debits or automatic payments can be a good way to manage your money, but they can become a problem if you don't have enough money in your account or you need to cancel the direct debit.

How to use direct debits

You can fix your direct debit at a certain amount, say $70 every period, or opt for a variable amount, where the merchant will deduct the exact amount of each bill. You can also choose if the direct debits come out at regular intervals or set dates. If you choose a variable payment make sure you always check your bill before the amount is deducted so you know how much is being taken out.

It's a good idea to set a fixed amount if possible and a fixed date for your direct debits. Set it up for the day after your payday. This will mean you will always know exactly how much money is coming out and you will definitely have enough money in your account to cover the bill.

Alternatives to direct debits

Direct debits can be a convenient way to pay your bills, but they take the control of making payments away from you. If a business offers a discount or cheaper rate for setting up a direct debit, ask if you are eligible for the same discount if you set up an automatic payment through your online banking.

While a direct debit is controlled by the company you are dealing with, you are able to start, stop and change an automatic payment yourself.

What could go wrong

Smart tip

Monitor your account so you know when money will be debited and how much you need to keep in your account to cover your bills.

Before you set up a direct debit, make sure you trust the direct debit service provider. After all, you are allowing them to take money from your account.

Even though it can be dull, read the service provider's terms and conditions. It can save you pain and money in the long run.

Before agreeing to a direct debit ask yourself:

  • Do you trust the service provider you are dealing with?
  • Do you know how to cancel the direct debit if you decide you don't need it anymore?
  • Are there other ways to the pay the business other than direct debit?

Be wary if you are being pressured into setting up a direct debit and are given no other payment options.

Check your account and bills

Mistakes can happen so check each bill to make sure you aren't wrongly charged for anything.

If you don't have enough money in your account to cover the direct debit, you may end up being charged a dishonour or overdraft fee by both your financial institution and the merchant.

How to cancel your direct debit

If you decide to cancel your direct debit, you should notify your financial institution in writing. Note in the letter what date you would like your direct debits to be cancelled and ask for a letter from your financial institution confirming your request.

Once your financial institution has received your instruction letter, they are obliged to make sure no more payments are debited from your account. They must also forward your instruction to cancel the direct debit to the service provider's financial institution. 

It's also a good idea to notify the direct debit service provider in writing and a keep a copy of the letter you send. You will be able to find the service provider's details on the form that you signed to authorise the direct debit. Use the template letters below.

What if the direct debit is not cancelled 

If your financial institution does not cancel your direct debit and your account is debited after you have requested it to be cancelled, your financial institution can't charge you overdraft fees to cover the debit. If you are wrongly charged, you should make a complaint and your financial institution should reimburse your account. See how to complain.

Cancelling a direct debit that is linked to a credit card

There are different requirements for cancelling a direct debit that is linked to a credit card. When cancelling these types of direct debits, you need to write a letter to both your financial institution and the merchant, to stop the direct debits.

Sample letters

Use our sample letters to help you cancel your direct debit:

Sample letter to service provider to cancel direct debit

Sample letter to bank to cancel direct debit

Make sure you keep a copy of the letters for your records.

Dealing with problems

If you check your bank statement and spot an incorrect charge or an unauthorised direct debit from your account, you should contact your financial institution as soon as you can. If you are unhappy with your their response, you can make a complaint to a dispute resolution scheme.

If you are thinking of using direct debits, set them up in a way that fits your budget and set it up so the money is withdrawn on the day after payday. This will reduce the risk of not having the money needed in your account. Monitor your bills and accounts regularly to make sure the right amount is being debited.

Related links

Last updated: 18 Feb 2016