Ben Todd | Jun 2, 2017 | 1
What is Direct Debit?
What is direct debit? It is an arrangement with an account provider where the account provider is given authorization to automatically debit a customer’s account. Authorization is given for the account provider to debit a customer’s account so the funds may be transferred to another account.
An account provider may be an online bank, a money company, a traditional bank or a credit union. A direct debit gives authorization for another account to request an amount from your account, and that amount is paid automatically.
Direct debits are more common in Europe. Most people in the USA do not talk about direct debits, they talk about ACH transfers or auto-pay transfers.
What Is Direct Debit In Its Simplest Terms?
If you set up a direct debit, you are giving permission to have your money transferred from your account to another account. You are giving the permission to your account provider, such as your bank, credit union and so forth.
For example, you may decide to set up a direct debit that pays $50 every month from your checking account to your savings account.
For example, you may set up a direct debit with your phone company where you give permission for $35 to be debited out of your account every month on the same date to pay your bill.
What Is The Difference Between A Direct Debit And A Standing Order?
When you set up a standing order, you are agreeing to have a certain amount taken from your account on a certain date. The amount of money that is taken is fixed. You may also set an end-date for your standing order.
A direct debit also transfers money from your account on a certain date, but the amount that is taken may vary. With a direct debit, the date is fixed, but the amount is not. The company or account that receives your money has to inform you in advance how much is going to be taken.
For example, if you pay your landline phone bill by direct debit, and your bill is $52.33 this month, then your phone provider has to send you a bill (usually an email) telling you that they will be taking $52.33 out of your account this month. Next month, your phone bill may be $49.69, so your phone provider has to send you a bill saying they are going to take $49.69 out of your account this month.
What Is Direct Debit?
Companies, banks and merchants may request that you set up a direct debit to pay your bill. They usually do most of the work for you where all you have to do is sign up for it electronically. When you agree to a direct debit, you are allowing that company/bank/merchant to remove a certain amount of money from your account on a certain date.
Your account provider (your bank, credit union or money company) may allow you to see which direct debits are currently set up. They may allow you to see which companies currently have permission to take money from your account. They may also allow you to see what dates they are allowed to debit your account.
Some people agree to pay bills and make payments via direct debit because it all happens automatically. Instead of having to remember to pay a bill, the money is simply taken from your account when it is due. The only problem is that if you do not have the money in your account at the time, then you may overdraw your account. There are also companies that will give you a discount if you agree to pay by direct debit.
What Do Some People Call Direct Debits?
Some people may call a direct debit by a different name. The words “Direct debit” are more common in Europe. In the USA, people usually say things such as ACH payments. Here are a few other names for direct debit payments:
- Authenticated Early Debit Order
- Auto-bill pay
- Automated Clearing House payments
- ACH payments or transfers
What Does ACH Have To Do With All This?
Direct debits are available in numerous countries, but it is only in the US where direct debits are handled exclusively by Automated Clearing Houses (ACH). That is why you may hear some people refer to direct debit payments as recurring ACH payments.
There Are Two Forms Of Direct Debit Authorization
The most common form of authorization is where a merchant, service or billing company asks you to sign an authorization for direct debit payments. It can be done manually on paper, but it is usually done online these days by clicking accept on digital forms.
Another way of authorizing a direct debit is to get in touch with your account provider and tell your account provider to authorize a direct debit payment. You have to tell your account provider what day the money should be debited, which company will be taking the money, and how much will be taken. This form of authorization is not as common these days because it is quicker and easier for merchants and service providers to have you authorize your direct debits online.
Do Direct Debits Cost Any Money?
As an account customer, be it a bank, credit union or money-company account, you should not be charged for direct debits. You shouldn’t be charged for setting them up and you shouldn’t be charged for using them. There are some occasions where business accounts may be charged for receiving them, setting them up, or using them, but private account holders shouldn’t have to pay for setting up direct debits or for direct debit transactions.
May I Set An End Date For My Direct Debit?
In most cases, you are unable to set an end date for your direct debit. In most cases, the account that is taking the money will simply stop taking the money. As an extra precaution, you may go to your account provider and withdraw permission for direct debits to the company in question.
If you have set up a standing order, then an end-date may be set. There are also some occasions where people in the USA are able to set end dates where the ACH company stops transferring money after a certain date, but you should probably assume that you cannot set an end date for your direct debit.
No matter what the circumstance, you should be able to contact your account provider and ask them to cancel future ACH transfers to a company/account, or cancel direct debits to a company/account. If the account provider says no, then close your account because that will also close any standing orders, ACH orders or direct debits.