What is a Direct Debit?

How do Direct Debits work?

A Direct Debit is an instruction or mandate you set up with a person or organisation, allowing them to automatically take an agreed amount out of your current account on a specific date.

This makes Direct Debits useful for regular fixed payments, but also for other expenses that are likely to change each time, such as fluctuating water or energy bills, as you won’t need to manually change your payments each time.

What is the Direct Debit Guarantee?

The Direct Debit Guarantee ensures customers feel confident using the Direct Debit process, by ensuring every bank and building society taking part in the scheme is inspected before they can collect any money.

It also covers any mistakes made on behalf of the organisation taking payment. If, for example, too much money is debited from your account, you are entitled to a full and immediate refund.

The guarantee also gives you the right to cancel your Direct Debit at any time by contacting your bank.

Direct Debit examples

Direct Debits can be useful for a variety of different payments, including:

• Utility bills, such as your gas, electricity, water, mobile phone and broadband.
• Other household expenses like council tax, TV license, buildings and contents insurance.
• Rent or mortgage payments.
• Subscriptions, including any streaming services, gym memberships, food services etc.

You can also set up a Direct Debit for a one-off payment. While not the fastest way to pay, you may wish to do this in order for your payment to be covered by the Direct Debit Guarantee.

Pros and cons of Direct Debits

If you’re thinking about setting up a Direct Debit, here’s some pros and cons to consider:

How to set up a Direct Debit

You can typically set up a Direct Debit through the company you wish to pay directly, which can be done online, over the phone or even by post. No matter which method you use, you’ll still need to provide the following:

• The name that appears on your current account.
• Your current address.
• Your banking details, including the name of your provider as well as your account number and sort code.

Keep in mind, it could take a few days for your new Direct Debit to clear, so make sure to keep checking on your account to ensure the first payment goes out correctly. It’s also worth noting that Direct Debits are only processed on working days, so it could take longer if you’re setting up a payment during the weekend or on a bank holiday.

How do I change the date of a Direct Debit?

Changing the date on your Direct Debits is usually a straightforward task. You’ll need to reach out to the company taking your payments and from there you should be able to alter which date the money is taken from your account.

How do I change a Direct Debit to a different bank account?

Again, this would involve going directly to the person or organisation you’re paying, not your bank. Most companies should have a ‘manage Direct Debits’ section where you can update your bank details, though keep in mind it could take a few days for the changes to be made.

When switching using the Current Account Switch Service (CASS), you should have the option to automatically move any Direct Debits over to your new account as part of the Current Account Switch Guarantee.

Can a company change a Direct Debit?

Yes, however as part of the Direct Debit Guarantee, you must be notified of any changes to your agreement whether that’s altering the amount, frequency or date of your payment.

This notice period will normally be a minimum of 10 working days, giving you time to challenge or cancel the Direct Debit if you are not satisfied with the changes.

What happens if a Direct Debit is returned?

A Direct Debit is usually returned, or ‘bounced’, if there’s not enough money in your account to cover the payment.

When this happens, some organisations will reattempt to take the money over the next few days or will reach out to notify you of the failed payment. However, even if the second attempt is successful, you could still face a late payment fee which could impact your credit score.

Direct Debits could also be returned if your banking details are incorrect, or if the Direct Debit was set up with the wrong organisation.

How to cancel a Direct Debit

A Direct Debit can be cancelled whenever; however, it is always your responsibility to do so. To cancel, you must reach out to your current account provider and select which Direct Debits you want to stop. You should also notify the organisation you’re paying to let them know about the cancellation, especially if you plan to continue paying via a different method.

It’s worth noting you’ll need to cancel at least one full day before your payment date, otherwise it may be ‘in flight’ meaning the money has essentially already been taken. Depending on if you still owe the payee, you can always claim back the money thanks to the guarantee.

Do Direct Debits affect your credit score?

This depends. The Direct Debit in itself does not have an impact on your credit score, however, missing payments or going into your current account overdraft can. Conversely, Direct Debits can also be used to help improve your credit rating through regularly making on-time payments.

Does cancelling a Direct Debit affect your credit score?

It can if you don’t follow the proper process. For example, if you decided to cancel a Direct Debit with your energy provider out of the blue, you’re likely to still have an outstanding balance with them. Therefore, if you don’t organise an alternative method, it could be recorded as missed payments which would then affect your credit score.

However, your credit rating shouldn’t be impacted if you either set up a new payment method, or if you no longer owe the payee.