Automatic Deductions: Watch Out for Errors

Automatic deductions (debits) from bank accounts can be a convenient way to pay some regular bills, saving you time, checks, and postage. These days, people pre-authorize monthly debits for everything from mortgages, student loans, and utilities to car payments, life insurance premiums, and health club memberships. But you can get into trouble if your automatic payment goes awry.

Trouble Spots

If your bank makes an error in dealing with your automatic deductions, you might face problems.

Your bank pays late. If your bank doesn't make automatic mortgage payments on time, it will be you who suffers the consequences: late fees and a blemish on your credit report.

Your bank doesn't make payments. And what if payments aren't made at all? One man whose life insurance premium was deducted monthly from his checking account had no idea that the bank, due to a systems error, had stopped making payments. The policy lapsed, but the family didn't find out until the man died.

Your bank makes payments that you want to stop. You might also find yourself facing the opposite problem: You want the bank to stop deducting a payment from your account, but every time you open your bank statement, there it is again.

How to Solve Problems

You have the right to halt unauthorized and most pre-authorized deductions at any time. Your bank may also have to cover late fees caused by its late payments. If you have a problem, here's what to do.

Contact your bank to stop automatic debits. If you're having trouble stopping an automatic debit, the fastest way to get results is to contact your bank, not the business that's receiving payments. Under federal law, you must call or write your financial institution requesting a "stop" at least three business days before the scheduled debit. If you make an oral request, the bank may require you to confirm it in writing within 14 business days of your call.

Notify your bank of unauthorized debts. If you receive a statement that includes an unauthorized debit, notify the bank within 60 days. Once you report the error, the bank must investigate within ten business days, then report the results to you within three business days after that. If the bank finds an error, it must correct it right away. If the bank needs more time to investigate, it must provisionally credit your account while it takes up to 45 more days to look into the matter.

Check your bank agreement if the bank pays late. If you've been hit with late fees because the bank was tardy, don't just pay up. Check your deposit agreement to see whether the bank is liable for the late payment fees.

Protect Your Credit

If you fear your credit history has been tarnished because the bank was late or missed payments, get a copy of your credit report from one of the big credit bureaus (Experian, TransUnion, or Equifax). If it shows missed or late payments that the bank was supposed to make, call the bank and request (politely, but firmly) a letter explaining that the error was the bank's fault. Send a copy of this letter to the credit bureau and ask it to correct the incorrect information.

This should resolve the situation, but if it doesn't, you can ask the bank to provide correct information to the credit bureau. If all else fails, remember that you have the right to add a brief statement to your credit file explaining that the bank missed the payment or made it late. (For more information, see Nolo's article Rebuilding Credit FAQ.)

Credit Repair, by Margaret Reiter and Robin Leonard (Nolo), is a comprehensive guide to repairing your credit and includes sample letters and forms.