Direct debit & Automatic Payments: 6 top tips

Direct debits and automatic payments (APs) make life a lot easier. No longer do people need to remember to pay by a certain date, write and post cheques, or queue up at the Post Office.

They save time and often come with discounts attached – or at the very least reduce the chance of late payment fees for forgetful types of people.

There are tricks to using direct debits and APs well. Read Canstar’s six tips for using direct debits and automatic payments:

  • Automatic payments.

A signed automatic payment authority tells a bank to pay a certain amount regularly to another account. It might be for rent or an investment. The AP can be for a fixed period of time or indefinitely. The account holder has control over the automatic payment and can change it at any time. If there isn’t enough money in the account, however it won’t be paid. Automatic payments offer more control than direct debits.

  • Direct debits.

Signing a direct debit gives someone else such as a company the authority to take money out of an account. They can be used for one-off payments or regular bills. Direct debits are often used to take irregular amounts of money out of customers’ account for telephone bills, gym memberships and other utility bills. One downside is that direct debit forms often have clauses in them that allow an amount to be increased at any time. Read the Banking Ombudsman’s quick guide on cancelling direct debits.

  • Honour and dishonour fees.

Kiwis pay millions of dollars to their banks every year for honour, dishonour, or unarranged overdraft fees. Dishonour fees are charged when someone exceeds his or her limit and the payment is dishonoured. Sometimes the bank honours the direct debit or AP anyway, but charges an honour fee for doing this. Those fees are often $10 to $20 a time, which can soon add up. Even the banks that have done away with honour and dishonour fees will charge for an unarranged overdraft. One of the best ways around these fees is to have an account earmarked for bills. On pay day have a sum of money credited to the account. The chances of the account being empty come payment time are lessened.

  • How to cancel a direct debit or automatic payment.

Banks are required under the Code of Banking Practice to cancel direct debits and automatic payments when requested by customers. It’s worth double checking that the request has been actioned – rather than try to chase for a refund.

  • Sweep facilities and text alerts.

Another way to avoid honour and dishonour fees on direct debits and APs is to use a bank that has “sweep” facilities. When this is set up money is swept into a current account from savings whenever the balance drops below a certain point. Some banks charge money for every sweep. Text alerts also cost money, but it’s better to pay a 20c text fee than a $20 honour or dishonour fee.

  • Always check statements.

Automatic payments and direct debits can go wrong. Canstar says always check bank statements to make sure that the direct debits or APs match the bills. It can happen that someone cancels a gym  or other membership, but fails to cancel the direct debit, which keeps deducting money from the ex-customer’s account.


Useful links:

How to reduce transaction fees

Switching banks: what’s involved?

Online Banking – Compare Interest Rates & Star Ratings

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