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Automated payments can become a quagmire

Published Feb. 23, 2006

As more people make use of automatic payments to pay their bills, some consumers are discovering how difficult it can be to cancel these arrangements.

Debt counselors, lawyers and Better Business Bureaus around the country are hearing an increasing number of complaints from consumers having problems stopping the recurring bills charged to their bank accounts and credit cards.

Many people seeking to halt these automatic payments are confused by the rules they must follow, which differ depending on whether payments are linked to a bank account or credit card. Some people have sued vendors or their banks to keep the charges from recurring. In December, Internet service provider America Online, a unit of Time Warner Inc., agreed to pay as much as $25-million to settle a consumer class-action lawsuit over the company's billing practices.

Banks, which typically split fees of between 1 and 3 percent on each recurring payment, say they work with consumers to try to resolve disputes. But consumers don't always know and follow the rules for halting recurring payments, and banks say they aren't able to cancel recurring credit-card charges when a consumer has signed a long-term contract with a merchant, such as an extended gym membership. Meanwhile, credit-card companies Visa USA and MasterCard International say they've upgraded their systems to help banks and consumers more efficiently stop automatic payments.

U.S. households last year paid an average 4.4 monthly bills using automatic credit and debit payments in transactions totaling $160-billion, a 42 percent increase from 2000, a MasterCard study found. Last year marked the first time automatic payments surpassed check writing as the dominant method for paying recurring bills.

More growth is expected this year as card companies process recurring bills for higher-ticket items. Visa saw a 158 percent jump last year in automatic payments for "property management" from a year earlier. American Express Co. has been encouraging owners of large luxury rental buildings to accept automatic payments from their tenants and has several hundred buildings signed up across the country. Tenants in some buildings may get Amex bonus points when they renew their leases using automatic payments.

Nancy Burleson's checking account was debited an extra week's mortgage payment on a house she sold in Grand Junction, Colo., last fall when she moved to New Hampshire. She had contacted her mortgage company, Countrywide Financial Corp., within the required time to stop the company from automatically debiting her checking account, and was assured the deductions would stop. But when she next received her bank statement, Burleson, a 48-year-old obstetrician-gynecologist, saw that the mortgage company had debited her account for an extra $819, after her house sale had closed.

Burleson said Countrywide denied it was continuing to debit her account. Only when she got a representative from her Colorado bank to call Countrywide did it acknowledge it had made a mistake. Burleson uses automatic debit to make mortgage payments on her new home, but says she is leery of using automatic payments for any other type of bills.

"When you shut it down they still have access to your accounts," she says. "Even though you have laws that protect you, they can still do it and then you have to take your time to fight it."

Countrywide declined to comment.

While automatic payment arrangements are easy to set up, consumers and advisers say they can be difficult to cancel. Because vendors are reluctant to give up the stream of payments that come with automatic debits, "they will make it as difficult as possible," says Elizabeth Warren, a law professor at Harvard.

Credit-card companies say some consumers mistakenly think they need to contact only their credit-card issuer to stop recurring charges. It's up to the consumer who links payments to a credit card to contact the vendor to get it to discontinue regular charges. One action consumers can take is to dispute a recurring charge in writing within 60 days after it shows up on a statement. Doing this each month, however, requires vigilance and effort on the part of the consumer.

For people who want to cancel recurring bills paid directly through a bank account or put on a debit card, there are more protections, as long as they follow the rules. Under federal law, a bank must stop making automatic deductions from your account when instructed orally or in writing, at least three days before the payment is made. However, some banks require written instructions. Once canceled, the bank is required to stop all future payments. It's advisable for consumers to notify a merchant but it is not required.

In the America Online case, the company agreed to settle a class-action lawsuit that claimed it had charged customers for accounts and services they had canceled or never requested. The settlement, filed in Illinois, consolidated 24 lawsuits nationwide.

AOL didn't admit wrongdoing and says it negotiated a global resolution to avoid the cost of further litigation. An AOL spokesman says the company allows customers to cancel their accounts by phone, fax or mail and says it provides detailed information about how to cancel in writing in the member agreement when a customer subscribes and on its Web service.

Some experts advise that consumers are better off paying bills online via their bank's Web site, although this could require more time. What's more, paying by credit card can rack up airline mileage points and other rewards. The automatic plans also could result in the consumer relinquishing negotiating leverage with vendors or landlords. For example, if you have a leak in your apartment, you can't hold back rent until the problem is fixed.


Unwinding an automatic bill payment can be difficult:

Banks are required to stop payments made from checking accounts or debit cards at a consumer's request.

Credit-card issuers won't cancel recurring charges. Instead, vendors must be contacted directly.

If a vendor persists in charging a credit card, consumers can dispute specific items.