How do Direct Debits work?

How do Direct Debits work?

Direct Debits: you set them all up, and then forget all about them. But how do Direct Debits work, really? This quick guide tells you all you need to know – and shows how this information could help you save money, regularly.

What is a Direct Debit?

A Direct Debit is a regular payment that leaves your bank account on a set date every month, quarter, or year. It’s a permission for your bank account to pay a third party on that regular basis, without any extra effort on your part. The four big advantages are:

  1. You don’t have to do anything, the bank does all the work.
  2. The payments can be varied without needing your authorisation each time.
  3. You can often spread the cost of something by paying in instalments.
  4. And you can usually decide which date a Direct Debit leaves your bank account, which means you can tie them in with payday: this means that, once the Direct Debit’s set up, you don’t need to worry about remembering to pay the bills.

The disadvantage of Direct Debits is that, if you don’t keep an eye on the bills, you may get an unpleasant surprise if more goes out of your bank account than you were expecting.

You set up a Direct Debit by signing a mandate (a slip of paper that includes your bank details, the details of the third party, and your signature), or giving your permission over the phone, which is confirmed in writing by the third party after the call.

Direct Debits vs. Standing Orders

There’s only one difference between Direct Debits and Standing Orders: the person you’re paying can decide how much money will come out of your bank account if you’ve set up a Direct Debit. A Standing Order always pays the same amount.

What happens if I can’t afford to pay the Direct Debit?

Third parties are supposed to notify you about the amount they’ll be taking well in advance of asking your bank for the money. If your account doesn’t have enough money in it, then the bank or building society may not pay the Direct Debit. It may charge a fee too, to let you know what’s happened – that’s why it’s important to keep an eye on the bills coming in.

What is the Direct Debit guarantee?

It’s a promise that’s made by all banks and building societies, to give you reassurance about the permission you’ve given. It says that:

  • If there are any changes to how much you’ll be paying, when or how often you’ll pay, then the third party must let you know well in advance (normally 10 working days).

This way, you have time to make sure enough money is in the account, or, if you’d like to challenge the amount you owe, you have time to contact the organisation. It also says that:

  • And if there’s a mistake, then you should get a full and immediate refund.

It’s as simple as that. But, if you get a refund that you shouldn’t have, then you must pay it back when the third party asks you to.

How do I cancel a Direct Debit?

Call your bank or building society. Tell them you want to stop a Direct Debit: they may ask you to confirm it in writing. It’s a good idea to let the third party know you’re stopping the payment, and make sure an alternative is in place if it need to be.

Do Direct Debits show up on credit reports?

Yes, often a credit agency will show your Direct Debit payment history as part of their report on your finances. When they do, and they’re all being paid properly, they’re a good indicator for lenders that you can meet payments on a regular basis.

How can I save money with a Direct Debit?

Many businesses offer discounts if you agree to pay by Direct Debit – energy companies are a good example. Sometimes, they’ll offer larger discounts for Direct Debits that are taken on a quarterly basis or annual basis, instead of a monthly basis.

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