How to handle pre-authorized payments on your credit card

Pre-authorized payments, also known as direct debits and pre-authorized debits, are amounts that you authorize to be taken from your bank or credit card account on a regular basis to pay for a service or goods. This might include things like your cell phone bill or a gym membership.

The amount may be fixed or variable, and it may be deducted on exactly the same day every month, around the same day, or on a weekly or bi-weekly basis. In other words, pre-authorized payments can be set up to suit your needs and the demands of the merchant that you’re paying.

What exactly is a pre-authorized payment?

A pre-authorized payment is when you approve a merchant to automatically debit the purchases made by you to your credit card, chequings or savings account.

The reason many people choose pre-authorized payments is most often for convenience, where you won’t have to remember payment dates, which means you don’t have to worry about missing a payment or paying late fees. Here is how a pre-authorized payment works:

• Regular subscription. You have a regular subscription to a service or goods delivered to you such as your phone bill, electricity bill or a membership. To set up a pre-authorized payment, you have to give the merchant permission to charge the amount each month to your credit card automatically.
• Agreement with merchant. To do this, you will need to sign an agreement (a contract) with the merchant.
• Bill to be taken from account. On the arranged date and frequency, the payment will be taken from your account or in this instance, charged to your credit card – until you decide to cancel the contract.
• Variable or fixed. The pre-authorized payment can either be variable or fixed, and the terms are flexible, meaning the bill can be charged weekly, bi-weekly, monthly, etc.

How to add a pre-authorized payment

While it can often be done in writing as well as online, you will need to sign a contract agreeing to the pre-authorized payment. This may include:

• Logging into the account you hold with the merchant and adding your credit card as a payment method. You will then need to select “pre-authorized” or “direct debit” as a payment method. If agreeing to this online, you can usually also cancel or change your payment method online too.
• If it cannot be completed online, the merchant will send you a contract which you will need to sign and return. This contract will lay out the details of your pre-authorized payments, and will likely also inform you of how you can cancel them should the need arise.

When a pre-authorized payment is a good idea

Whether a pre-authorized payment is a good idea or not will depend on your financial situation. A pre-authorization on a credit card is good for people who:

• Don’t want to spend time or worry about having to pay bills by a due date. Since the process is automated, it will be out of your mind so that you can concentrate on other more important things.

However, there are drawbacks to using pre-authorized payments including:

• Over-committing. It’s easy to get carried away with pre-authorized payments since you don’t physically have to initiate the payment of the bill yourself each month. Before you sign another pre-authorization agreement, check to make sure you can actually afford it.
• Limit restrictions. Credit card restrictions can also work against you, such as rewards credit cards not offering rewards points for pre-authorized payments.
• Disputes. Disputes can be time consuming and difficult to remedy, especially if the pre-authorized payment has already been made to your account.
• Dishonoured payment fee. If the pre-authorized payment is refused by your credit card provider, you might have to pay a dishonoured payment fee.

Pros and cons of pre-authorized payments

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When to cancel pre-authorized payments

• Cancel a pre-authorized payment with the merchant if you have cancelled your agreement for whatever reason. If you do decide to cancel your pre-authorized payment, you will have to pay any outstanding amount owed to the merchant.
• If you want to switch from pre-authorized payments to a different payment type, cancel your pre-authorization agreement.

How to effectively cancel a pre-authorized payment on your credit card

It is entirely your choice to cancel a pre-authorized payment and you do not have to explain why you are doing so. All you need to do is send a letter to the merchant, and copy in your credit card provider or bank. Some merchants also allow you to cancel a pre-authorized payment online, without submitting a letter.

However, keep in mind that cancelling a pre-authorized payment may not end your liability to the merchant if an amount is outstanding or you have entered into a contract that still has some time left on it. You must be especially careful when a contract states that payment must be made by pre-authorized debit, and you have signed your agreement to this.

Some points to note:

• If you cancel the pre-authorized payment, you are still legally bound to pay the merchant for services and goods already provided to you.
• If your contract with the merchant stipulates that payment has to be made with pre-authorized payment, speak with a financial professional or a lawyer BEFORE cancelling your pre-authorized payment.

Step by step instructions on how to cancel a pre-authorized payment from your credit card

1. Write a letter of cancellation to your merchant and keep a copy for yourself.
2. Write a letter to your bank or credit card provider stating that you have cancelled the pre-authorized payment to your credit card.
3. Wait a few days, then call the merchant and check whether the pre-authorized payment has indeed been cancelled. Once you have cancelled your pre-authorization, make sure you receive a confirmation from both the merchant and your credit card provider.

Depending on the merchant, it’s sometimes possible to cancel a pre-authorized payment online. You will need to:

1. Log in to the merchant’s website and navigate to your payment page.
2. Select a different type of payment method or cancel your goods or services.
3. Wait a few days, then check back online to see whether the pre-authorized payment has indeed been cancelled.
4. If you have any issues, contact the merchant directly as well as your credit card provider, who may be able to put a stop on the payment.

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Frequently asked questions about pre-authorized payments

• What should I do if a pre-authorized payment was charged to my credit card after I cancelled it?

  Contact the merchant and ensure they received the notice to cancel the pre-authorized payment. In addition, contact your credit card provider to put a stop on the payment. It may be difficult to get the money returned for the payment, however it’s best to take action with the merchant first before lodging a dispute with your credit card provider. This is because the merchant could likely refund the money within days, while a dispute through your credit card provider may take a month or longer.

• Can I get rewards points for pre-authorized payments on my credit card?

  Most credit card providers do not consider pre-authorized payments as eligible transactions for rewards points or cash back. Contact your credit card provider or read your credit card Product Disclosure Statement to learn about the specifics of your card.