Auto-Debit on Credit Cards: Don’t Do It

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Subramoney talks about how his credit-card payment went for a toss, with ICICI Netbanking failing when he most needed it, and he had to pay a fine. A suggestion via a comment was to do auto-debit instead. But that’s a HUGE mess – I wouldn’t recommend it at all.

Why not?

Look at the terms. (ICICI and HDFC auto-debit forms are online)

I unconditionally and irrevocably authorize HDFC Bank Ltd. to debit my Savings/Current account for .. (minimum/total amount due).

Really? Unconditionally? Even if they decide to charge me some crappy fee for no reason at all. And don’t tell me that won’t happen – there have been so many dirty transactions at credit cards that I still have to proof-read all my statements in microscopic detail.

The Past Scandals

Remember the Citi-Credit Card scam? To those who don’t – read this article by Monika Halan – the funda was that Citi would charge about Rs. 99 per month as an “insurance premium”, after providing the first year free on the card. This became a big scandal because more people realized it and Citi refused to stop the practice initially, saying customers could cancel if they wanted to. Only much later after all sorts of media reports did they stop it.

Even now, I get calls about health insurance and other “Plat-5” schemes where they can debit your card by just your instructions on the phone. That means if you find something like this on your card bill, and it has an auto-debit, your card will get charged even if you dispute it! It can take months to resolve, and meanwhile, the money is gone.

Charged for even a temporary Lack of Balance

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If for any reason you don’t have money in the bank on the day they decide to debit your card – remember, it’s not debited on the due date but a few days before, and you don’t know when – you get hit with the bank fees for “insufficient balance” and the card fees for “auto debit rejection”. These can add up to Rs. 1,000 after service tax. And now, you have to work with two entities – the bank and the card – to figure out what happened. Additionally, until you make the payment, you may be charged interest on the card balance!

Misaligned Incentives

Like @p0ppad0m said on twitter:

Makes it difficult to dispute charges, since the card company has no incentive to investigate after u’ve paid

Exactly. Once they have the money, it’s your problem.

Can’t take it back

The second worrying point is "irrevocably”. That means once you give your auto-debit instruction, you can’t take it back. They reinforce it later:

I further agree that the auto debit instruction cannot be withdrawn/cancelled without the written consent of <bank>.

Wow. That really clinches it.

So how do you pay your credit card bill?

  • Online transfer – now most banks allow credit card payments from other banks’ netbanking facilities.
  • Visa Money Transfer, Mastercard Moneysend – if you have a third-party transfer registered online you can use it to pay any credit card bill. (Check out Visa Money Transfer at HDFC)
  • Pay via a cheque. This was my preferred mode of operation until the netbanking facilities opened up. Sometimes banks play dirty and don’t cash the cheques until after the due date. This is a mess, because you need proof of having dropped something at an ATM.
  • Pay in cash at a teller counter – I’ve done this when the cheque would have been too late. But banks usually charge for this separately.

Keep a photocopy of your application forms

Atul Chitnis (@achitnis) mentioned that he was auto-debited despite not applying for it. But he raised hell and they said he had registered – he had to show them a photocopy of his application form to fix the problem. This is a great piece of advice – keep a photocopy of your application forms (not just credit cards, of mutual funds, or share broker accounts or such).

Conclusion

I wouldn’t go into an auto-debit with these onerous terms. Sure, once in a while I may have to drop a cheque if netbanking fails, but it’s far easier than hoping that these companies will continue to be honest forever. I’d rather keep the reins in my hands.

3 COMMENTS

  1. >I'm regular reader of your blog. I wanted to dispute on the "Can’t take it back" part. RBI recently made it clear that the account holder can stop ECS payments without involvement of the party executing the ECS.

    From http://www.rbi.org.in/scripts/ECSUserView.aspx?Id=25

    "The destination branches can debit their customers’ account only on the basis of the mandates given to them. The account holder / customer is also entitled to withdraw the mandate / ECS Debit instructions from its banker without involvement of the user institution, The withdrawal instructions of a customer would be treated equivalent to a ‘stop payment’ instruction in cheque clearing system. "

  2. >Ashok,

    have you ever tried to act on what you have commented/disputed.

    Yes its in the RBI laws/framework, but the fact is is it followed by individual banks and can you TRUST them for adhering to that?

    There are Rules and Regulations for Traffic, anybody follows?
    regards

  3. >@Siddharth,

    Just mentioning that you will take up a matter of violation of RBI regulations (if you can quote the relevant directive, even better) with the Banking Ombudsman will get a bank to undo their non-compliance.

    Getting them to redraft agreements will probably take a lawsuit or the heavy hand of the RBI.

    SEBI directives work wonders with errant brokers. I know it works`since I've got them to reverse their initial no-can-do attitude in a matter of non-compliance, just by quoting chapter and verse from a SEBI directive.

    An informed and active customer is a rather powerful agent of change. The more we stand up, and more of us that stand up for what our regulatory authorities insist on in terms of our protection from exploitation of customers by banks/brokers the better.

    This blog is doing a good job of higlighting how our rights are being trampled on in addition to the great posts on other things finance.

    Keep up the good work Deepak.

Comments are closed.