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What is a Direct Debit?

Category: Banking
Author: Tim Leonard
Updated: 28/09/2018

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.

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 by giving a certain number of days' notice. You are in control of a standing order and can change or cancel these at any time.

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

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.

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, you may be able to rely on a buffer zone, if your current account has one. 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 or your account will go into an overdraft if you have one arranged. 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 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. It is always a good idea to check your credit report to make sure of your status.

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 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 Scheme

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.

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

The 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.

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.