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When Ashley Weeks's health club offered her a cheaper membership if she had her monthly payments automatically debited from her bank account, she jumped at the chance. After all, the contract was only for a year, and if she didn't renew, her gym membership and the payments would end right then, no questions asked. "When the charges continued after the year had ended, I thought my gym had made a simple mistake," she says. "But when I protested and the debits continued, I felt deceived." Weeks's health club ignored her complaints and continued charging her for three months, only stopping the withdrawals from her account after she threatened legal action. Her money was never returned.
The popularity of automatic debiting services, which include payments you authorize your bank and credit card company to make on your behalf to creditors, other credit cards, and service providers, is soaring. The National Automated Clearing House Association (NACHA), a nonprofit rule-making group representing more than 12,000 financial institutions, says some 12 billion automated payments were made in 2004. The advantages for the consumer are obvious: These transactions are paper- and stamp-free, and payments are always made on time (preventing late fees and extra interest charges). For banks and merchants, electronic payments are usually cheaper to process, so they encourage their use by pairing them with bargains or interest-rate discounts on loans.
But, as Weeks discovered, no system is foolproof. Banks, credit card companies, retailers, and service providers can and do make errors -- or may even try to cheat you. Certainly, billions of these transactions are processed each year without incident, but the number of unauthorized debits has increased 68.5 percent from 2002 to 2005. According to NACHA, there were 3 million such incidents in 2004 alone. The most common causes are errors (incorrect amounts or dates entered), but buyer's remorse (when a consumer authorizes a payment but later changes her mind) also plays a role, as does fraud, says Michael Herd, NACHA spokesman.
Weeks may never know whether her health club was hoping to bill her indefinitely, or if there was a legitimate mix-up. But either way, the lesson is the same: Automatic doesn't necessarily mean accurate. Enrolling in automatic payment plans shouldn't lead you to ignore your accounts. Most unauthorized debits can be prevented or caught early enough to fix if you stay on top of your finances. Read on to find out how to protect yourself against some of the commonest unauthorized debit risks.
Danger: The amounts taken out are not the amounts you agreed to. Owing to a clerical error, you could be billed twice in one month, for instance, or you could have been deliberately overcharged. No matter how it happens, you can wind up paying too much.
Your Best Defense: Don't be complacent. "It's important to compare your bank and credit card statements with your bills," says Gail Hillebrand, senior attorney with Consumers Union, publisher of Consumer Reports, in Yonkers, New York. "On your billing statement, by law, the creditor must tell you ahead of time when the debits will go through so you can call if there's an error." If the problem is with a credit card, you can contest that charge, too. Also, examine your statements carefully to be sure you're not being billed twice.
Danger: Many free trial offers ask you to input a credit card number so the company can start billing you when the free trial ends. But often the onus is on you to cancel the service.
Your Best Defense: Companies bank on your simply letting the cancellation deadline slide. Read the fine print carefully and mark on a calendar when the trial period ends. If you don't want to continue the service, cancel it in writing. Consider sending your letter return receipt requested so you have proof that your request arrived. Follow up by phone.
Danger: Charges from services that regularly billed a card keep arriving after you cancel the card. Depending on your contract, the credit card issuer may continue to accept charges and bill you in return even though an account has been closed. Even if your card denies the charge, the biller might try exacting penalties or extra interest.
Your Best Defense: Don't rely on the credit card company to do your legwork. If you cancel a card, notify businesses that automatically bill that account and give them an alternate credit card number (check your last statement if you can't remember which companies bill the account you want to terminate). Likewise, when a card expires, provide billing companies with the new information.
Danger: If you cancel a service, such as cable TV, the bills may continue, whether it's an innocent slipup or a merchant's attempt to squeeze a few more payments out of you.
Your Best Defense: Don't assume charges will stop automatically. If you cancel a service, keep tabs on your accounts so you'll know if debits continue. Notify the billing company if there is an error.
When disputing an automatic debit, your legal protection depends on whether funds were withdrawn from a credit card or checking account, says Gail Hillebrand, senior attorney with Consumers Union.
Checking Account: Your bank must investigate your complaint and has 10 business days to resolve the issue. If it can't, it must restore the money to your account until the matter is settled. The bank is not legally obliged, however, to handle disputes over debits you authorized. If you order a product and receive the wrong size, for instance, the bank needn't get involved. However, a bank must heed your instruction to not make a payment from your account if your request is made at least three business days in advance.
Credit Cards: No matter why you're disputing a charge to your credit card, you have a "charge-back" right, meaning you can usually contest the charge and withhold payment in the event of a dispute. You must make a real effort to resolve the matter with the billing company before you ask your credit card issuer to reverse the charge. After that, at your request, the credit card company will stop payment and contact the business to determine whether your complaint is legitimate. If the creditor agrees with you, your refund stands; if not, you must pay the disputed amount, plus finance charges.
Originally published in Ladies' Home Journal magazine, July 2006.