Do Direct Debits improve your credit score?

August 4, 2022 Icon 4 mins read
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A Direct Debit is an agreement made with an organisation that means they can directly charge your bank account. Do direct debits improve your credit score? The short answer: Yes! But there are some caveats to be aware of.

What are Direct Debits?

Direct Debits are a way to set up recurring payments with an organisation, without that organisation having to rely on you setting up a standing order. It means that they can directly charge your current account. It is the third most popular payment method in the UK, after cash and debit card.

Direct Debits were first introduced at Unilever in 1964, as a way to collect money from ice cream vendors. Unilever owns Wall’s Ice Cream, so they were doing gangbusters. However, Unilever found themselves frustrated by constantly cashing all those cheques and setting up standing orders. It was much easier to agree with the vendors that Unilever could dip into their business accounts as and when, and so, the Direct Debit was born!

As a side note, it’s important to always keep your sort code, account number and other personal details a secret, because they can be used to set up Direct Debits in your name! The television presenter Jeremy Clarkson found this out the hard way.

Do Direct Debits improve your credit score?

Direct Debits can improve your credit score.

Your credit score is really a measure of your reliability as a borrower. This is termed “creditworthiness”. If you make repayments on time every month, this reflects well on you as a borrower.

However, there are some caveats that you need to be aware of.

First, just like writing a cheque, you need to make sure that there actually is money in your bank account to be debited. If you pay bills or rent via direct debit, always ensure the money is in your current account. If not, the bank could refuse the payment, or you may end up eating into your overdraft. Late payments and overdrawing are both bad for your credit score.

What’s more, Direct Debits are easy to cancel, far easier than other methods. However, cancelling a direct debit without prior warning to the bank or the people with whom the direct debit is set up could also negatively affect your credit score, since this can also cause you to miss payments.

Pitfalls of Direct Debits

Trust

If you set up a Direct Debit with someone, you are effectively giving them the keys to your current account. Be sure that you trust the people with whom you have a Direct Debit!

Unsteady income

If you don’t have a steady income stream, a Direct Debit might not be right for you. Because Direct Debits allow an organisation to take money directly from your bank account, they may end up having the request declined or eating into your overdraft. This could put you into debt.

Late fees

If your Direct Debit is declined, you may end up having to pay late fees. This won’t look good on your credit score, and it could mean you end up paying even more. The bottom line is to always budget carefully and ensure that you have the minimum amount required to pay your bills at the time you pay every month.

Improve your credit score

If you’ve made a blunder with your Direct Debit and damaged your credit reputation, don’t panic. While it’s certainly not good thing to damage your reputation, you can recover from it. Sign up today with Credibble. Credibble can give you the guidance you need to get your credit score back on track.

Simply give us a bit of information, and right away we can give you pointers on how to fix your credit. A subscription to Credibble costs less than £10 an month. The unique interface tells you exactly where your sticking points are.

The 24-Factor Credit Check shows you six Factors composed of four Sub-Factors. Each of these factors is coloured green, yellow or red. Green indicates things you should keep doing, yellow indicates points of improvement, and red indicates points where you are falling behind. Reduce the amount of red Factors and watch your creditworthiness go up.

If you’re worried about your credit score, there’s never been a better time to sign up with Credibble.

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Robert Edwards

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