Guides

What is a Direct Debit?

What is a Direct Debit?

Category: Banking

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. In 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. Direct debits are usually taken on the next working day; however, if you sign an agreement that the company can take the payment earlier, then it is possible for them to do this.

The difference between a direct debit and a standing order

The main difference to a standing order is that the company or person you are paying can change the amount of the direct debit or the date they take it – although they must inform you of this first with a certain number of days notice.

If a company changes a direct debit how must they inform me?

According to the BACS Service User's Guide and Rules to the Direct Debit Scheme (version 3.3) "valid advance notice can be given in written,electronic form or orally. Proof to the paying bank that advance notice has been issued does not provide proof of receipt by the payer."

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 by "a letter addressed to you, in your statement*, in an invoice*, in a schedule where dates or amounts are known in advance or within a contract which may be issued between the company and the payer. * NB – both of these must clearly display that collection is for direct debit, the amount to be debited and the debit due date.".

However, the company may also notify you of a change to your direct debit by "electronic notification on any form of electronic hardware", which could include email or via their website. However, this method of communication is risky to both parties as you may not receive the email or visit the website.

On rare occasions the company "may find it necessary to give oral notification to the payer". However, this is also risky for the collector as "the paying banks cannot accept a voice recording transcript as proof of advance notice."

Reference: BACS Service User's Guide and Rules to the Direct Debit Scheme (Version 3.3).

What if I don't have enough in my bank account to pay a direct debit?

If there isn't enough money in your account to pay a direct debit, your current account may have a buffer zone. This is basically a small interest-free overdraft that your bank won't charge you for if you creep into it.

Exceed the buffer zone and your bank or building society may not pay the direct debit and may even charge you a fee. If paying a direct debit pushes you into an unauthorised overdraft, you may have to pay additional charges as well.

If you know beforehand that you won't have enough in your bank account, the best thing to do is arrange a temporary overdraft with your bank to pay the direct debit. Alternatively, you could try to negotiate a later payment date with the company in question.

If you miss direct debits regularly, you should consider changing payment dates or paying by a different method.

Will all direct debits show on my credit report?

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.

How to cancel a direct debit

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

If you don't pay a bill in a certain time frame, it could even go onto your credit file and affect your credit rating.

The Direct Debit Guarantee Scheme

"The direct debit guarantee applies to all banks and building societies taking part in the direct debit scheme. It says that:

  • If there is a change in the amount to be paid or the payment date, the person receiving the payment (the originator) must notify the customer in advance. Advance notice can be given in written or electronic form or orally.
  • 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."

Reference: The Financial Ombudsman - Issue 27 - Banking - direct debit guarantee

Does the Direct Debit Guarantee Scheme cover payments made by debit or credit card?

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

What next?

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. Use it with:

  • iPhone and iPad - iOD4 and iOS5
  • Android 2.3 (Gingerbread) and 4.0 (Ice Cream Sandwich). Correct at 30/07/14.

What is a credit card continuous payment authority?

What is a standing order?

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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