Read our simple overview of the basics of direct debits, including the dangers they present.
Have you got a Netflix account? Get a newspaper delivered? Pay for health insurance? If so, chances are you have a direct debit, even if you’re not 100% familiar with what the term actually means.
Direct entry payments (direct debits made with both debit cards and credit cards) are a huge component of Australia’s payments network. According to the Australian Payments Network, the annual value of these direct debits is more than $15 trillion.
But how exactly do direct debits work, and what are the dangers of using them? Let’s take a look.
What is a direct debit?
A direct debit is an automated transaction taken from one account to another, processed electronically. They’re commonly used for recurring payments, such as:
- Mortgage repayments
- Insurance premiums
- Utility bills
- Subscriptions (Netflix, Spotify etc.)
- Rent payments to flatmates
- Gym memberships
- Phone & internet bills
You get the idea. But one-off payments that you make to friends or family aren’t direct debits – only the ones that occur frequently and don’t require manual payment.
Depending on where the direct debit comes from, it can be either a fixed or variable cost.
Also, they don’t necessarily have to be made with a debit card or transaction account either. It can also be through a credit card, which can lead to a bit of confusion when the term ‘direct credit’ comes up.
What’s a direct credit?
Direct credits are normally payments into your account. They’re used by businesses to make regular payments into transaction accounts – your salary, for example, is a direct credit. Other examples of direct credits include:
- Centrelink benefits
- Tax refunds
- Share dividends
So think of direct debits as money out and direct debits as money in. Chances are you’ll have far more direct debits than direct credits, but if you’re saving money, the total value of your direct credits should exceed that of your direct debits.
How to set up a direct debit
Setting up a direct debit will be different for each business depending on what they’re selling, how much you’re paying and the frequency of payments. But the general process will be the same:
- You enter your credit card/debit card details when buying online, or;
- You provide your credit/debit card details on a paper form or in person when buying at a physical store.
The details you need to provide depend on whether the direct debit is from a bank account or a credit or debit card:
Commonly required details for direct debit from a bank account
- Account number
- Account name
Commonly required details for direct debit via a reoccurring credit or debit card payment
- Your card number
- Name on the card
- The card’s expiry date
- The CVV number (the three numbers on the back)
Direct debits are easy to set up, which can cause problems for people who are either short on money or perhaps can’t be trusted with it (hello credit card debt?). Fortunately, they’re also just as easy to cancel.
How to cancel direct debits
When times are tough or you just don’t want to keep paying for a service you don’t use anymore, know that it’s easy to cancel a direct debit. Usually, you have to cancel them with the merchant you’re paying money to and to start a direct debit payment you probably had to make an account on their website to start one.
So simply log back in and find the section where you can either cancel or postpone your payments. Obviously, this will mean you’ll no longer have access to that service when the money stops leaving your account, but that’s why you wanted to cancel anyway right?
If they don’t have an online business then write to them in person or call/email them to get them to cancel. As a customer, you have a right to cancel your direct debits at any time.
Banks are currently unable to cancel direct debits on your behalf in most circumstances.
What are the dangers of direct debits?
Having money automatically leaving your bank account at regular intervals obviously presents some dangers.
The organisation could be untrustworthy
This is just a precaution, but always make sure you trust the service provider and do a quick scan of their website and Ts & Cs (terms and conditions) if you aren’t convinced they’re a reputable buyer. Everyone knows something like Netflix is a reputable business that won’t steal your money, but a site like www.thisisprobablyascam.com (not a real website) maybe isn’t so clear. So do a bit of digging, maybe by looking at online reviews, to see how reputable and safe they are.
If you get scammed, you’ve lost money and now face the reality of a dodgy website having your card information.
You lose control over your spending
Gone are the days of households writing cheques and sending them to individual merchants and banks to pay their bills. Now everything is automated, which a lot of people definitely prefer. After all, direct debits do make it much easier to pay for things, but this can lead to a ‘set and forget’ mentality.
Back in the era of cheques, people knew exactly how much was going in and how much was going out, but nowadays many people simply have no idea. A study conducted by UBank in late 2018 found a mind-boggling 86% of people don’t even know how much they’re spending.
Keeping receipts, tracking your expenses in an excel spreadsheet or using some of the popular budgeting and expense tracking apps available can help you keep control of your expenditure in the direct-debit era. You can also ask your bank to provide you with a list of your recurring direct debits and credits.
Be wary of subscription creep
Subscription creep is when more and more subscriptions add up over time without you realising it. They can sneak up on you! You might be fine with paying for a monthly Netflix subscription. Then you decide to get Stan because you want to watch Better Call Saul or the collection of Disney-Marvel movies your mouse overlord (Mickey) put on there. Then you decide to lose some of that Christmas weight and join your local gym. Then you decide to get a new health insurance policy billed monthly. Then you decide to…
Before you know it, you’ve got more than a dozen subscriptions every month, each one taking $10+ out of your bank account. A dozen $10 subscriptions is $120 a month, which is $1,440 a year.
So do an audit of your subscriptions to see which ones you could do without and which ones you don’t even remember paying – there might even be a former free trial in there somewhere that you forgot to cancel after you milked the free subscription period for all it was worth.
Move them over when shifting banks
If you’re one of the 40% of people still with their childhood bank, then it might be time you switched to another one. But once you’ve found your new account, you have to transfer over all direct debits from your existing one unless you intend to keep it. Direct debits to a closed account can result in late fees from the merchant, overdraft charges from your bank and potential cancellation of that service.
When switching, you can ask your bank for a complete list of the last 13 months worth of direct debits, or you can download your transaction history in online banking and have a look yourself. Under ASIC reforms put in place all the way back in 2012, banks have to support you in your desire to switch, whether that’s just downloading a list of your direct debits or actually contacting each payee and updating your details for you.
Note that there may be different rules depending on whether the direct debit is set up from your account (i.e. using your BSB and account number), or directly from your credit or debit card (e.g. Visa or Mastercard). A bank might not be able to cancel or amend direct debits set up to be taken directly from cards.
Savings.com.au’s two cents
Direct debits are now a staple of the Australian bank account and they’re useful for making lives easier. Just don’t forget that they’re there, and remember to review your spending account’s ins and outs every so often so you know where the money is going.