Ins and outs of direct debits

01.Ins and outs of direct debit

A direct debit is an arrangement with a third party to withdraw money directly from your account or credit card. They can be used for fixed monthly payments (health or car insurance) or variable amounts (electricity or telephone bills).

For variable amounts, you'll usually get a bill indicating the amount and date. If the direct debit is from your bank account, your bank may charge you a fee.

Potential pitfalls

A direct debit is a transfer of control to a third party so it's important to read the agreement carefully before you sign it and check the following:

Do you trust the merchant or service provider? Trying to remedy incorrect debits can be time-consuming. There's always the possibility of unauthorised amounts being transferred from your account by unscrupulous merchants.

Is the bill for a fixed or a variable amount? A direct debit is best suited for a regular fixed amount as this makes it easy to budget. If it's for a variable amount make sure you get the bill first, to check how much you'll have to pay. Ask the merchant whether the direct debit can be capped at a maximum amount.

When will you pay? Ask the merchant whether you can be debited at a fixed date and choose a date after you're paid to ensure you have sufficient funds in your account. If the direct debit bounces, your financial institution and the merchant could hit you with a dishonour fee. Or the bank might choose to honour the direct debit but charge an overdrawing fee and default interest.