When you miss a payment that was scheduled to automatically come out of your bank account by direct debit, this is called a dishonour. Dishonoured payments can impact your ability to get a loan as it may indicate poor financial management.
Tips to help you increase your chances of getting a loan
- Keep track of your fixed weekly expenses on your loan repayments, phone bills, utilities and other bills, and know how much you need to set aside for all of your expenses and financial commitments.
- Check your bank account to ensure you have sufficient funds to cover your expenses when they fall due.
- Set reminders on your phone a few days before your bill’s due date to keep on track with your repayments.
- Set up direct debits for your loans and utility repayments a day after your pay day. This should help you to avoid falling short before your repayment due date.
- You may want to consider setting up a separate bank account for your direct debits and repayments that always has extra funds in it, to ensure that no direct debits or repayments are missed.
- Set a budget and financial goals for how much you should spend weekly on groceries, travel, takeaways and other expenses.
- By being mindful of your spending and timely repayments, you can avoid dishonour fees and could save up to $15 – $20 per potential dishonour.
Here at Finance One, we understand life is not always smooth sailing and managing finances can be hard. We can consider your loan application even if you’ve had a few mishaps along the way.
Read on to find out more about how to avoid dishonours:
What are direct debits?
A direct debit is simply an authorisation you provide for a third party to collect money directly from your bank account or credit card. Typically, the third party will be a creditor. When your bill is due, the company will request funds from your bank account. With the authorisation in place, your bank will release the funds to cover your bill.
Direct debits may be used for recurring amounts or payments that vary in price. Common direct debit payments include:
- Loan repayments
- utility bills
- telecommunications bills
- insurance premiums
- mortgage repayments
- subscription services
What is a dishonour fee?
If you have insufficient funds in your bank account when your creditor tries to collect the amount you owe, your bank may decline the payment and charge you a dishonour fee. It’s important to note that only cleared funds can be used for a direct debit — for example, your account balance could be $300, but if only $100 of that amount is cleared funds, and your bank tries to pay out $120 for a direct debit, the payment may be declined and a dishonour fee charged.
If you don’t have enough money in your account when the transaction is attempted, on top of a dishonour fee from your bank, you could also cop a dishonour or overdue account fee from your merchant or creditor.
How do I set up a direct debit?
You can set up a direct debit through your product or service provider. Usually, they will have a form that you’ll need to complete and sign, which authorises them to withdraw money from your account at an agreed-upon time, for a specified amount. Be aware that the specified amount could be as open-ended as the amount you owe — if the direct debit is for something like utility bills, be careful not to get caught with insufficient funds in your account if you get an unexpectedly high bill.
What can go wrong with direct debits?
While direct debits are generally considered a safe and efficient way to pay, sometimes things can go wrong.
You’re taking a risk by permitting a third party to withdraw funds from your account. If you set up a direct debit, make sure you completely trust the service or product provider. Setting up a direct debit is basically like handing over a signed blank cheque to someone.
Keep an eye on your bank account to ensure the product or service provider is only withdrawing the agreed amount of money. If you notice amounts being taken from your account that you did not agree to, contact your bank immediately, and they can organise for the direct debit to be stopped.
Variable payment amounts
When a direct debit is set up to help with budgeting purposes, it can become tricky if the amount you’re paying — whether weekly, fortnightly or monthly — is not a fixed sum of money. If the payment amount varies depending on your usage of the product or service, it’s a good idea to periodically check on your account balance — whether it’s your internet bill, electricity usage or some other variable amount. Your provider will often have an app you can download onto your phone to easily keep an eye on your usage, so you don’t get any nasty surprises when your payment is processed.
How do I cancel a direct debit?
To cancel a direct debit, simply contact your bank and tell them you would like it stopped. Be aware that if you cancel your direct debit and still have payments due, you will need to organise an alternate payment method to avoid having a default recorded on your credit file or being charged further dishonour fees by the product or service provider.
Avoiding a dishonour fee
When you’re running low on money, having extra fees lumped on top of your financial commitments is the last thing you want. There are steps you can take to avoid dishonour fees.
Communicate with your creditor
If your payment is close to being due and you know you’re not going to have the cash, contact your service provider. Often, they’ll be happy to offer a payment extension or plan so you can have a bit of extra time to sort out your money.
Prepare a budget
When you prepare a budget, you have an overview of what money is coming in and going out. If you find you’re spending more money than you’re making, it’s a big sign that you need to make some changes. If your income and expenses are financially sustainable, but you still get the occasional dishonour fee every now and then, you may be able to time your cash flow better. If you arrange for your direct debits to come out of your account around the time of your wages coming in, it can help you prioritise your expenses. For example, if your important expenses come out straight after payday — like loan repayments, electricity or rent — you can cover your essentials first and then spend the rest as you please on discretionary expenses.
Use an overdraft facility
When you have an overdraft facility through your bank, you’re able to spend more money than you have available in your account. However, an overdraft facility comes with its own fees, charges and interest, so the costs are probably comparable to being hit with a dishonour fee.
Using an overdraft facility means that your bank won’t decline the payment when your service provider tries to withdraw funds greater than the amount that is cleared in your account. So while you’ll probably need to pay fees for your account being overdrawn, it could help you to avoid late payment fees with your provider. It is important to weigh up and compare the costs of all fees involved to make sure you are using the best option for you.
Like most things in life, some pros and cons come with using direct debit. If you keep on top of your income and expenses, avoiding dishonour fees should be easily achievable. But don’t beat yourself up over the occasional slip-up — it happens.
Disclaimer: The information above is of a general nature only and does not consider your personal objectives, financial situation or particular needs. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your particular circumstances. We do not accept responsibility for any loss arising from the use of, or reliance on, the information. Please note that approvals for loan applications are subject to satisfactory documentation being received to properly assess the application. Normal lending criteria apply. Fees and charges are payable. Terms and conditions apply.