Better Business Bureau

PUBLICATION NO. 148
REVISED 07/97

Direct debiting is a means of debiting (charging) your bank account based on information you give over the phone. The procedure may be attractive to you if you don't have or don't want to use a credit card or don't want to write and mail a check to pay for whatever you're buying.

Automatic debiting, also known as electronic fund transfers (EFT) is often used to make car, mortgage, or insurance payments, as well as other payments that regularly come due.

How to Authorize Direct Debits

To authorize a direct debit to your account, usually for a one-time transaction, you give the person you're paying your bank account number. You may also give the company the number of your next unused check. Either they or a third party verifies your account information and, as your agent, prepares a paper draft (also called a "sight draft" or a "demand draft"), which the bank treats like a check except that you never sign it.

There is, right now, no regulation requiring your written authorization for this kind of debit.

Debit Cards

You can also authorize a direct debit to your account by using a point-of-sale debit card. A debit card is a plastic card, like a credit card, that is used to instantly debit your bank account, rather than assigning the purchase to a line of credit. Debit cards are similar to ATM cards, except that point-of-sale cards are used to purchase goods or services rather than to obtain cash. These cards are especially attractive to merchants because they allow the immediate transfer of funds to their accounts, eliminating the possibility of fraud, theft, bounced checks, etc., associated with credit cards, checks or cash.

There are two types of debit cards:

An on-line card is used in transactions where most purchases are paid for by cash or check, such as at gas stations, supermarkets, etc. You enter a personal identification number (PIN), and the transaction is completed once a computer verifies that your account balance can cover the purchase.

Off-line cards, like checks, provide a "float," with funds withdrawn about three days after the purchase. On-line transactions may cost 50 cents or more each. Off-line cards have minimal fees of about $1.50 a month. Your bank may charge you to use a debit card, if you're using an ATM; so may the bank that owns the ATM. In some cases, you may be paid to use your card, though.

Some debit cards can be used for either on-line or off-line transactions. If you intended an off-line transaction that goes through, instead, as an on-line one, your bank account might be overdrawn. To tell the difference, if you need to use your personal identification number (PIN) at the time of the transaction, that's a signal that the transaction is on-line and that the money will be withdrawn from your account immediately. If, instead, you sign something like a credit card receipt, the transaction is off-line, and you will have a few days' float before the money is withdrawn.

How to Authorize Electronic Fund Transfers

You can authorize regular automatic debits for car or mortgage payments or other obligations that require periodic payment through an electronic fund transfer (EFT) from your account to someone else's. EFT authorizations require some paperwork and are subject to some federal regulation. Like paper drafts, these transactions will show up on your bank statement.

Pitfalls of Debits

Debiting For An Excessive Amount - Debits can be a convenient, legitimate way to make payment. The problems arise when a company abuses the authorization you gave them. For example, some companies will debit your account for more than you expected. It may be difficult for you to get this kind of problem resolved.

Prize and Credit Card Scams and Other Unauthorized Debits - Another common scam involves postcard notification that you've won some major prize. To collect, you call a toll-free number. When you do, you're asked for your bank account numbers and the number of your last written check so that the swindlers can "verify" that you can pay some hefty charge required to collect your prize. (Just another reminder: you should never pay anything to collect something you've won.) In this case, your account is debited, but your prize never arrives.

Or you may call to respond to an offer for a major or low-interest credit card. You'll most likely be told you qualify for the card, but you'll be asked your account number so that the telemarketer can debit your account for the fee for the card. Again, your account will be debited, but you'll most likely never receive your card or hear from them again.

Sometimes a health club or other organization or company to whom you've authorized regular automatic debits goes out of business but continues debiting your account. Or a company may ignore your cancellation of your contract with them and continue debiting your account. Similarly, a company may continue automatic debiting in spite of a government agency's order prohibiting its doing business under its present business practices.

Your Liability for Errors and for Lost and Stolen Debit Cards

If you think an unauthorized charge has been made against your account or that some other problem or error has occurred, report it to the issuer by certified mail, return receipt requested, within 60 days of the date you received your periodic statement or terminal receipt. The institution will investigate the charge and notify you of the results.

What if you lose your debit card or it is stolen? Generally your loss is limited to $50. However, if someone uses it without your permission, you can lose more, depending upon the circumstances.

If you report an ATM or EFT card missing before it is used without your permission, you will not be held responsible for any unauthorized withdrawals. But if unauthorized use occurs before you report the loss or theft, how much you are responsible for depends upon how soon you report the loss to the card issuer.

How to Protect Yourself

With so many odds against you if you should inadvertently deal with a dishonest business, what protection have you against automatic debiting scams?

First you should realize that, by law, a telemarketer is required to obtain your verifiable authorization to withdraw payment from your bank account. That is, you have to give them your express permission, and you have to do it in one of three ways:

(1) in writing

(2) by tape-recording your verbal authorization, or

(3) by sending you a written confirmation before debiting your account.

Besides being aware of how you authorize this kind of debit and what disclosures are required, here are at least a few steps you can take to avoid becoming a victim:

• Realize that your checking account can be debited without your written authorization. Guard against unwittingly giving information over the phone that might serve as unintended authorization and could result in an unexpected debit.
• Don't give your checking account number over the phone when you're solicited by someone you don't know.
• If you're asked for your checking account number, ask why the caller needs this information. But be aware that a plausible answer may still not mean it's safe to give the number. (Telemarketers can be very convincing.)
• If someone says they're taping your call, ask why.
• If you do give out your checking account number, first make certain the company is legitimate. Ask for the company's offer in writing before you agree to a purchase. Get a reliability report on the company from the Better Business Bureau before you do business with the company or authorize a debit.
• You might consider paying by check or credit card, which offer more consumer protection, rather than by automatic debit. (For example, you may dispute a credit card charge for goods that were never delivered or that were misrepresented if you paid by credit card. However, although your debit card issuer may allow you some protection against these problems, they are not required to.)

• Review your bank statement as soon as you receive it to verify withdrawals.
• Although you are likely not to find out about an overcharge until you receive your monthly statement or your checks start bouncing, you may be able to stop payment, should you decide you would rather not allow the debit, before the transaction is presented to your bank. This could give you some chance to change your mind if you decide you acted too hastily in agreeing to the transaction.
• Before you contract for EFT services or make your first electronic transfer, the financial institution you contract with is required to give you written disclosures, including a summary of your liability for unauthorized transfers and a notice telling you how to report errors and the time period within which you must report them. However, since a number of factors can affect the extent of your liability for unauthorized transfers, check with your issuing institution should a problem or question arise.

If you believe you've been a victim of fraud, contact your bank immediately. Tell them you did not authorize the debit and you want to prevent further debiting. If your confirmation notice does not accurately represent your understanding of the sale, use the refund procedure. If you can't get satisfaction from the company, you may file a complaint with the Better Business Bureau.