What is a Direct Debit?

Direct debits are a way to pay regular bills from your current account, such as your council tax or TV licence.

You can set up a direct debit by signing a Direct Debit Mandate form with the firm you wish to pay. On the form, you arrange with the firm how much you are going to pay and when. A direct debit can be set up to pay on a particular date every month, quarter or year.

Money is automatically taken from your bank account by the company you are paying, according to your instructions.

With a direct debit, you give permission to the company to take an agreed amount of money from your account on the agreed dates. With a standing order, you give your bank an instruction to pay a third party the agreed amount on the agreed date.

In practice, the main difference is that the company (or person) you are paying with a direct debit can change the amount of the payment or the date they take it, although they must inform you of this by giving a certain number of days' notice. You are in full control of a standing order and can change or cancel these at any time.

The most widely accepted form of notice is written. The company or person you are paying by direct debit may give you written notification of a change, e.g. by a letter addressed to you, or in your statement.

The company may also notify you of a change to your direct debit electronically, e.g. via email or via your account on their website if you have one. However, this method of communication is risky to both parties as you may not receive the email or visit the website.

While you should ideally always ensure that you have enough funds in your bank account to cover all direct debits, many banks will offer customers the option of an interest-free overdraft that acts as a buffer zone, but only for a very limited amount. As long as you stay within the buffer limit, you won’t be charged for going into it, but overdrafts should really only be used for emergencies as if you exceed the overdraft limit and go into an unauthorised overdraft, you could find yourself hit with extra charges.

The key to managing your direct debits is being organised and, if you know that you won’t have enough money in your bank to cover the direct debit, you should contact your bank to see if you can arrange an overdraft that will cover the money needed. If this isn’t possible, you could instead try to contact the company due to take the direct debit and negotiate a later payment.

Not always. Some credit accounts where you pay by monthly direct debit may not appear on your credit report. Some companies only provide details to a credit reference agency of credit accounts where outstanding monies are owed to them. In addition, a credit reference agency may not hold information on certain accounts, or the company you have a direct debit with may not provide account details to the credit reference agency. It is always a good idea to check your credit report to make sure of your status.

You can cancel a direct debit at any time, although it is best to give your bank or building society a few days’ notice before the payment is due to be made. Make sure you inform the person or company who receives the payment before you cancel it, as you could incur fees or penalties for non-payment of a bill.

The direct debit guarantee applies to all banks and building societies taking part in the direct debit scheme. As well as describing how firms must advise customers of a change in the payment, the guarantee also says that:

• If the originator or the bank/building society makes an error, the customer is guaranteed a full and immediate refund of the amount paid.
• Customers can cancel a direct debit at any time by writing to their bank or building society.

The guarantee does not cover recurring payments made by debit or credit card. This is what is referred to as a continuous payment authority.

Stay on top of your finances with a handy tool from the Direct Debit Control Centre. This free app can help you to keep track of all of your direct debits, making sure you always know how much is scheduled to leave your bank account and when.