If you've got a brain like a sieve and you're always forgetting to pay the bills, or if you're too busy earning money to spend time doling it out to all the people you owe, direct debit could make things a lot simpler. Setting up automatic payments can put an end to late fees and nasty final notice letters, but it's not without its drawbacks and risks.

What is a direct debit?

A direct debit is a deal with a third party to withdraw money directly from your bank account or credit card. It can be used for:

  • fixed monthly payments (eg. rent, loan payments, insurance premiums)
  • variable amounts (eg. electricity or telephone charges for which you usually receive a bill)

Pros

  • Direct debit can be a useful tool for managing your payments, particularly if you're forgetful!
  • Some utilities and organisations offer discounts for payments made by direct debit.

Cons

  • 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, otherwise it's like signing a blank cheque.

What are you signing up for?

  • 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.

Cancelling a direct debit from a bank account

You can cancel a direct debit linked to a normal account by contacting the financial institution and/or the merchant (better to let both know).

  • Some banks allow you to cancel over the phone, while others ask you to fill out a form or visit a branch.
  • It's best practice to cancel the direct debit in writing and keep a copy.
  • If the bank charges a fee, try to cancel with the merchant first.
  • Refer to the Code of Banking Practice if necessary. Credit unions and building societies have similar provisions in their Mutual Banking Code.

Cancelling a direct debit from a credit or debit card

To cancel a direct debit from your credit or debit card you'll need to notify both the biller and your bank.

  • If the merchant fails to act on the cancellation request, you can dispute all subsequent charges with your financial institution.
  • Carefully check your statements, and contact your bank for a chargeback if you continue to be charged. It's important to do this ASAP as there are time limits for chargebacks.
If you have any problems, contact the Financial Ombudsman Service.