People use automatic payments set up with a merchant or other service provider to pay bills and other recurring payments from their bank or credit union accounts. This could be for utility bills, credit card bills, monthly fees for childcare, gym fees, car payments, or even a mortgage. Such automatic payments can be a convenient way for people to make sure they pay their bills on time. Some lenders offer an interest rate reduction on loans for paying by automatic debit. However, consumers have told us that in certain cases, they have had trouble stopping automatic payments after providing a company with their bank account number.
Therefore, before you give anyone your bank account number and permission to automatically withdraw money from your bank account on a regular basis, it’s good to know how automatic debits work, what to be careful about, and how to stop the automatic payments if you cancel the service or just change your mind about how you want to pay.
How do automatic debit payments work?
You have choices about how to pay your bills. Some of your choices are to pay by check or to pay electronically. Most banks provide online or mobile bill payment services that let you schedule and send payments through your bank, either on a one-time or recurring basis. Another electronic payment option is to give permission directly to a company, such as a merchant or lender, to take payments from your bank account on a recurring basis. We’ll call these automatic debit payments. Let’s take a closer look at this last form of electronic payments.
To set up automatic debits directly with a company, such as a student loan or mortgage servicer or even a gym, you give the company your checking account or debit card information and give them permission (“authorization”), in advance, to:
- electronically withdraw money from your account;
- on a recurring basis, usually at regular intervals like every month.
You can set up automatic debit payments to pay the same amount each time, or you can allow payments that vary in amount within a specified range – for example, for your utility bill that changes each month. The company should let you know at least 10 days before a scheduled payment if the payment will be different from the authorized amount or range, or the amount of the most recent payment.
How are automatic debit payments different from bill-pay?
Automatic debit payments work differently than the recurring bill-pay feature offered by your bank. For recurring bill-pay, you give permission to your bank to send payments to the company. With automatic debits, you give your permission to the company to take the payments from your bank account.
Be cautious about giving anyone your bank account information and authorization
Automatic payments can help you stay on track with bills and other regular payments. However, be careful about giving a company permission to take payments directly from your account.
Before you give a company permission to make automatic withdrawals:
- Verify the company. Before agreeing to let a company automatically take money out of your bank account, make sure the company is legitimate and credible. Consider using a different payment method until you’re sure you’re happy with the company or service. Never give your bank account or debit card information to a company that you’re at all unsure about.
- Know your rights. A company cannot require you to repay a loan by automatic debit from your checking account as a condition for giving you a loan (unless the loan is an overdraft line of credit). Be wary of a company that pressures you to repay by automatic debit.
- Be careful about overdraft and insufficient funds (NSF) fees. Automatic payments can help you avoid late fees on your bills. But if you forget to track your account balance and it’s too low when an automatic (or other) payment is due, you might have to pay overdraft or NSF fees. Both the bank and the company might charge you a fee if there is not enough in your account. These fees can add up quickly. Pay close attention to your bank account balance and upcoming automatic payments to make sure there will be enough money in your account when the payment is scheduled.
- Review the terms of your agreement for the automatic payment. The company must give you a copy of the terms of your payment authorization. The payment authorization is your agreement to allow the company to debit your bank account for payment. The terms of your authorization must be laid out in a clear and understandable way. It’s important to review the copy of your authorization and keep a copy for your records. Make sure you understand how much and how often money will be taken out of your account. Monitor your account to make sure the amount and timing of the transfers are what you agreed to.
You have protections – including the right to stop automatic payments
Federal law provides certain protections for recurring automatic payments. You have the right to stop a company from taking automatic payments from your bank account, even if you previously allowed the payments. For example, you may decide to cancel your membership or service with the company, or you might decide to pay a different way.
If you decide you want to stop automatic debit payments from your account:
- Call and write the company. Tell the company that you are taking away your permission for the company to take automatic payments out of your bank account. This is called “revoking authorization.” Click here for a sample letter.
- Call and write your bank or credit union. Tell your bank that you have “revoked authorization” for the company to take automatic payments from your account. Click here for a sample letter. Some banks and credit unions may offer you an online form.
- Even if you have not revoked your authorization with the company, you can stop an automatic payment from being charged to your account by giving your bank a “stop payment order.” This instructs your bank to stop allowing the company to take payments from your account. Click here for a sample “stop payment order.”
- To stop the next scheduled payment, give your bank the stop payment order at least three business days before the payment is scheduled. You can give the order in person, over the phone or in writing.
- To stop future payments, you might have to send your bank the stop payment order in writing. If your bank asks for a written order, make sure to provide it within 14 days of your oral notification.
- Be prepared to include a copy of your revocation to the company (see step 1) with your written stop-payment order.
- Monitor your accounts. Tell your bank right away if you see a payment that you did not allow (authorize), or a payment that was made after you revoked authorization. Federal law gives you the right to dispute and get your money back for any unauthorized transfers from your account as long as you tell your bank in time. Click here for a sample letter.
Be aware that banks commonly charge a fee for a stop payment order. Further, cancelling your automatic payment does not cancel your contract with the company. If you want to cancel a contract for a service, like cable or a gym, be sure to cancel your contract with the company as well as telling it to stop automatic payments. If you cancel an automatic payment on a loan, you still have to make payments on that loan.
We want to know about your experiences, good or bad, with using and with cancelling automatic payments – leave a comment on the blog below.
If you’re having a problem with a bank account or service, submit a complaint to the CFPB at consumerfinance.gov/complaint or (855) 411-2372.
Have questions about consumer financial products and services? Find answers at consumerfinance.gov/askcfpb .