Direct Debit

What Is a Direct Debit?

A direct debit (also called a "DD", "direct withdrawal", or "debit order") is a popular and convenient payment method where funds are automatically deducted from your bank account for a pre-authorized expense.

Understanding Direct Debits

Most commonly used for recurring payments, such as cellular contracts, credit card payments, utility bills and other regular expenses, direct debits allow companies to deduct funds directly from your bank account. In turn, this gives you the convenience of not having to instruct the same payment on a regular basis.

Direct debits are widely used in many countries across the world, including the United Kingdom, United States, Australia, Canada, and the Eurozone countries. They can be thought of as a special type of bank transfer which, like ordinary transfers such as standing orders and direct deposits, make use of the funds transfer system of the country in question, such as the ACH in the US, CHAPS in the UK, and SEPA in the EU.

Unlike other types of money transfers, however, direct debits are instructed not by the payer but by the payee. This means that although the payer does need to provide some form of initial authorization for the direct debits (the particularities of which differ from country to country), the ultimate instruction for the payment comes from the payee.

The Pros & Cons of Direct Debits

Direct debits present a safe and convenient payment service that has the upper hand over other payment methods for a number of key reasons. For example, direct debits offer the following advantages to consumers:

  • Great for recurring payments, whether they're fixed or variable;
  • A very secure payment service with a lot of consumer protections;
  • Typically comes at no cost;
  • Associated with greater convenience and flexibility.

On the other hand, direct debits can present several challenges and disadvantages which don't always make them the best payment service for all circumstances. These might include:

  • High fees when bank balance is too low to cover the expense;
  • Can be forgotten about and lead to unnecessary expense;
  • In some cases, cancellation can be a lengthy process;
  • Associated with less control.

So, When Should I Choose Direct Debit?

For the reasons we touched on above, direct debits may indeed be your best bet if you need to pay for certain types of services. Assuming direct debits are available in your country, we recommend that you set up a direct debit if you have a recurring expense that you'd like to pay for directly from your bank account.

Bear in mind that many people opt to use regular bank transfers rather than direct debits for some everyday expenses such as rental payments and savings deposits. This is usually because direct debits are sometimes unavailable, as the payee in these cases aren't firms and are therefore restricted from supporting direct debits.

As a result, we recommend that you first explore whether or not your regular expense can indeed be paid for using direct debit services, and then opt for the service whenever you feel it makes sense for you.

Photo by Sincerely Media on Unsplash

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