RateCity.com.au
  1. Home
  2. Bank Accounts
  3. Articles
  4. What is a direct debit?

What is a direct debit?

Jodie Humphries avatar
Jodie Humphries
- 3 min read
What is a direct debit?

A direct debit is a way for you to set up an automatic transfer of funds from your bank account to the account of another person or organisation. Direct debits can be particularly helpful to pay for regular commitments such as your energy or internet bill, insurance premiums, and phone bill. Direct debits are also convenient to pay for your subscriptions to different services, apps, or streaming video channels. You can set up direct debit payments for your loan repayments as well or to settle credit card dues. 

Pros and cons of direct debit 

Once you set up a direct debit, you don't need to remember the due date for paying a particular bill. Even if you forget, the payment is made automatically on a particular date, so you don’t have to worry about late payment penalties. 

When you pay using direct debit from your bank account, you’re using funds from your savings instead of using a credit card. This means you avoid the interest and fees associated with credit card spending.  

Another advantage of using direct debit as a mode of payment is that you can access a range of facilities and subscriptions, some of which are not offered using any other payment method. 

However, direct debit payments can become a problem if you forget to maintain a sufficient balance in your account on the day when the debit hits it. You may be charged a dishonour or overdraft fee if this happens, and your credit rating could be dented

Another disadvantage of setting up a direct debit payment is that, if you’re dealing with an unscrupulous vendor, they could make it difficult for you to cancel when you want to. Another common problem is that you yourself may forget how many services or subscriptions you have signed up for. You may continue spending on subscriptions you’re no longer using because you forget to cancel the direct debit. These small amounts add up and could deplete your savings. 

How to set up a direct debit 

When you need to make recurring payments to a merchant, you may choose to set up a direct debit process. In some cases, the financial institution or merchant could insist on direct debit as a condition of accessing their services. To set up, you’ll need to provide details of your bank account to the merchant. Typically you’ll have to tell them the account holder’s name, the bank name, BSB number and account number. 

You could also make direct debits from your credit card. You may choose to do this when you’re shopping by providing your credit card details. You will need to furnish the cardholder's name, the card number, expiry date and CVV number. 

If you decide to change your bank, remember to transfer all your direct debits to your new bank account. If you forget to do so, payments to merchants will not go through and they may charge late fees or cancel your service.  

How to cancel a direct debit 

When you need to cancel a direct debit payment, contact the merchant and inform them, preferably in writing. You may be able to login to your customer account and cancel online. You could also inform your bank to be doubly sure. 

Disclaimer

This article is over two years old, last updated on January 28, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent bank accounts articles.

Compare bank accounts

Product database updated 21 May, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.