Preauthorized Debit Definition

For many consumers, preauthorized debit transactions are an important part of personal money management. However, while having money automatically withdrawn from an account prevents missed payments, it can also put consumers at risk of overdrawing their account or being scammed.

Description

A preauthorized debit is an arrangement to withdraw funds directly from a bank account at predetermined intervals, such as monthly. Depending on the payment agreement, the amount withdrawn can be fixed or fluctuate over time.

Types

Automatic debit transactions are typically used to pay ongoing bills, such as loans and utilities. Preauthorized debits also can be used for one-time payments, such as taxes, or for payment plans, in which money is debited periodically until the full balance is paid.

Benefits

Using preauthorized debit services to pay bills is convenient and faster than sending checks by mail. It also ensures that you won't forget to pay a bill and end up with unnecessary fees. Also, many companies offer discount incentives to automatic debit enrollees.

Considerations

The initial debit arrangement cannot be made without the written (paper or electronic) or recorded consent of the account holder. It is against the law for a company to withdraw money or the bank to authorize a withdrawal without the consumer's permission.

Dangers

The U.S. Federal Trade Commission warns against fraudulent telemarketers and businesses that use dishonest means to obtain consumers' account information and authorize withdrawals. Even when an initial debit arrangement was made, charging unexplained or misrepresented fees to a consumer's account is illegal. Consumers can protect personal accounts by asking the bank to reject any future debit attempts.

Overdrawal Concern

If you authorize a debit arrangement, you are responsible for making sure there is money in your account to cover the withdrawal. If there is not, you can overdraw your account.