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Debit Cards, Direct Debt and ACH Payments


Other than using checks to transfer money, you can easily transfer money electronically to pay for goods and services or to withdraw cash with a debit card. You can use a debit card to withdraw cash from a checking as well as from a savings account. Additionally, you can use a debit card to make purchases anywhere credit cards are accepted. A debit card allows merchants to debit funds directly from your checking account just like a paper check. There is no line of credit and no credit limits attached to a debit card. Instead, your ability to make purchases is limited only by the amount of money in your account or your bank's preset and arbitrary spending limit. Debit cards can be a very convenient method of payment. However, some banks and merchants levy transaction fees when you use the card. Be careful when using debit cards as fees can quickly mount.

When a debit card is lost/stolen or used fraudulently, your protection against fraud varies according to how soon you notify your bank of the fraud. If you notify your bank within 2 days, your liability is generally limited to $50. If you notify the bank within 60 days, your liability could be as much as $500. If you do not report the loss within 60 days, you may be liable for the entire amount. What is worse is that, unlike with credit card fraud, debit card fraud involves actual money being debited from your account. So, your account could potentially be overdrawn until your bank completes its investigation, which could take up to 10 days. Clearly, it is very important that you safeguard your debit card, and report any loss of your debit card to your bank immediately.

Direct Debit and Automatic Clearing House (ACH) Payments

You can also transfer money electronically without a debit card or credit card by using a Direct Debit. Direct Debits are a type of electronic transfer wherein you authorize a third party, (a company usually) to deduct funds from your account. Once a company has received an authorization to execute a direct debit, it submits this order to an authorized Originating Depository Financial Institution (ODFI) who, in turn, forwards the request to an Automated Clearinghouse (ACH). The ACH then notifies the Receiving Depository Financial Institution and the funds are taken out of the payer's account. That's how it works, but that is also a lot of confusing jargon. In the next paragraph, we'll restate this sequence in plain English so that it makes more sense.

In plain English, direct debit works like this. You need to pay your bill to Company A. You call Company A and give them permission to take the money you owe them out of your checking account. They notify their bank that they have your permission to get money through direct debit. Their bank notifies the automated clearinghouse. The automated clearinghouse then contacts your bank, takes funds out of your account and deposits them into Company A's bank account.

The direct debit process is actually very simple and usually takes just a few days to complete. Using direct debiting allows you to avoid the hassle of writing a check and mailing it out. Instead, you can authorize a company that you wish to pay to take funds right out of your account via the telephone or a web page.

If the direct debit process is so easy, then how are you protected, you might ask. One way that you are protected is that companies need to be pre-approved to initiate a direct debit transaction. You can rest assure that Jimmy, the neighborhood thief, will not be able to initiate a direct debit from your account. Banks thoroughly scrutinize any entity applying for status as an originator of direct debit transactions, and Jimmy would surely fail such scrutiny. ACH protections are covered by Regulation E of the Securities Act of 1933. This regulation outlines what a consumer's rights are in the event that an error is made in an ACH transaction. An error is defined in this rule as an unauthorized or incorrect transfer of funds, a transfer to or from the wrong account, a discrepancy in bookkeeping caused by an ACH transfer, or the disbursement of an incorrect amount of money from an ATM.

If a direct debit (ACH) error occurs, you have the right to dispute the error, orally or in writing, within 60 days after it appears on your banking statement. The bank may require you follow up in writing within 10 days if you initiate a dispute orally. The bank will have 10 days to conduct an investigation regarding the error and another 3 days to notify you of the results. If the investigation cannot be completed within 10 days, the bank may take up to 45 days to investigate if it provides you with a provisional credit within 10 days. The bank may withhold $50 from this credit however. If the bank determines that an error has occurred, it has one day to correct it. On the other hand, if the bank determines that an error has not been made, you will be notified in writing with the details of the bank's investigation. The bank will also debit any provisional credits from your account.