How do automatic debit payments from my bank account work?

Answer:

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, 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, and what to be careful about.   

How do automatic debit payments work?

To set up automatic debit payments 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 than 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. In recurring bill-pay, you give permission to your bank or credit union to send the 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. 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 also have the right to stop automatic payments – click here for information.

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