Type ‘direct debit’ into your internet search engine and the words ‘hassle free’, ‘easy’ and ‘simple’ will likely pop up in your results. Indeed, this form of automated transaction can make life a lot smoother, allowing you to set up regular payments, then forget them. If you’re busy or distracted (or both), it can be a handy way to save time and avoid late fees.

For all their benefits, direct debits also come with potential drawbacks: you may not have the funds in your account to cover a transaction, taking you into overdraft. Or your contracted service provider could turn out to be untrustworthy. Relying on direct debits for a large number of bills and expenses may also mean you lose track of how many automated payments you have on the go at any given time.

In a year when budgets are tight for many Australians, it may be time to review exactly where your direct debits are going and how many of them you really need, to help you save a little extra.

What are the types of direct debit?

A direct debit is an agreement with a third party, allowing them to draw specified funds directly from your bank account or credit/debit card.

Some direct debits are voluntary; you establish them to make your life easier. Some are a condition of sale or service; the third party requires you to pay in regular instalments.

There are also fixed and variable direct debits – your mobile phone charges or rent may be a set amount each month, but your spend on electricity and water will likely vary.

How do I review my direct debits?

Reviewing direct debits is a straightforward process of going through your bank and credit card statements and itemising all your recurring payments. It’s a good idea to review a full calendar year, to catch any annual transactions. If you can review two calendar years, even better – set your figures side by side to see how they’ve changed.

Once you know where you’re making direct debit payments, it’s time to decide whether you still need them – or if you can get a better deal. Start by asking yourself a few questions in these three areas.

1. Reviewing your subscriptions

Do you need four devices linked to your Netflix account? Can you cut movies from your Foxtel subscription? Do you still use that random computer antivirus subscription you signed up for 10 years ago? Does the job website you subscribe to provide you with useful leads?

Which subscriptions are essential, and which can be paused or ended completely? Also check whether you’re now paying for any of those ‘free trials’ you signed up for, but don’t use.

2. Reviewing buy now, pay later plans

Is this the best way to purchase an item? Yes, you have the item immediately and get to pay it off in instalments. But if you fall behind in payments, the late fees may mean you’re overpaying for your purchase, plus you may also be charged interest if your direct debit is linked to a credit card with a running balance.

Review the asking price of the item you bought versus the full amount you end up paying. How much could you be saving by paying outright, or using alternative plans like lay-by, with no account keeping or late fees?

3. Managing cash flow

Do you have sufficient funds in your account to manage irregular bill amounts, in particular unexpected rate spikes? If this is an issue, you may want to consider ‘bill smoothing’, a process where you establish automated payments of a set (and known) amount to cover utilities and telecommunications charges. It can help take the shock out of fluctuations.

How do I cancel a direct debit?

Before you pause or end direct debit payments, check the fine print on any contracts you’ve signed – some memberships, for example, have minimum terms or exit fees attached. If you can readily contact the third party to cancel your service and associated direct debit, and to discuss any affected terms in your contract, then do so.

If this proves difficult, you can contact your financial institution to request a cancellation, specifying when you want it to begin. By lawⁱ, your bank is required to cancel the direct debit transaction and notify the third party. Usually it takes one working day before your next payment for the cancellation to come into effect.

It’s a good idea to have cancellations in writing, so you’ll be prepared to dispute any fees that continue to be debited from your account.

How direct debits can impact your credit score

Your credit score is calculated based on a number of factors, including how much money you’ve borrowed, your credit applications, and your demonstrated ability to pay back debts on timeⁱⁱ. Lenders take your credit score into consideration when you’re applying for loans. Any direct debit that bounces, is late or sets your account into overdraft may impact this score, and then your ability to secure a low-cost loan in the future.

i Moneysmart.gov.au: Direct debits

ii Moneysmart.gov.au: Credit scores and credit reports

©AWM Services Pty Ltd. First published October 2020