If you have a bank account and make automatic regular monthly payments for services and other priority bills, you probably already use direct debit. But what exactly is direct debit, and what other forms of automated payment services should you be aware of?
Direct debit is a financial transaction. Typically, a direct debit is a contractual agreement between a business and a customer and occurs on an agreed payment date.
The business will make a withdrawal request from the customer’s bank account, and if the customer has the funds to meet the payment then the funds will be transferred directly into the business’ bank account.
In order for a direct debit to work, the customer has to provide their bank account details to the business, so it’s not possible for just anyone to request funds from your bank account by direct debit. Businesses who use direct debits are strictly regulated and there are consumer protections in place to help customers who may have had a direct debit taken incorrectly.
A direct debit can be set up for regular payments, usually things like electricity bills and mortgage payments, and because the service is automated, you don’t have to worry about meeting your repayments on time as the institution collecting the payment will do so automatically.
Direct debits can be cancelled at any time, but most banks will require at least 1 days’ notice. To be on the safe side, it’s best to check with your bank, or the financial institution collecting the repayment, how long before the payment is due the direct debit needs to be cancelled. In some cases, it may take up to 3 working days, so cancelling the direct debit the day before (even directly with your bank) may not guarantee the payment won’t go through.
If you are cancelling direct debits because you are facing financial difficulty, it’s a good idea to get in touch with a free and impartial debt advice service who will be able to offer advice on managing your repayments.
If a direct debit request is made and you do not have the funds in your bank account, you might see a ‘returned DD’ note on your bank statement. Some banks charge for returned direct debits so it’s best to try and keep your account in credit when you know you have payments coming up. You can even set up direct debits between your own bank accounts, although it’s probably simpler to set up a standing order.
A direct debit will normally go through if you don’t have the funds in your account, but you do have an arranged overdraft in place. If you have an unarranged overdraft however, the payment is likely to be returned. As long as you have the funds to make the payment, an alternative arrangement can be made with the service provider if you do miss the payment, but missing payments frequently or consistently can have serious consequences such as being cut off from your gas and electricity supply or, in a worst case scenario, having your home repossessed.
CPA is continuous payment authority and it’s usually used by financial institutions who are collecting payments owed to them either for providing a loan service or a subscription service. CPA is done using card details rather than bank account details, and you consent to the use of CPA when you sign your loan agreement. However you do have the right to cancel the continuous payment authority at any point by getting in touch with your lender. The responsibility to make the repayments on time and in full still falls wholly with you and most customers will often set up a standing order if they cancel their CPA to avoid making manual payments each month.
A standing order is a recurring transaction that you set up and control either through mobile, online, phone or in branch banking. You select the amount, the date the transaction is to be processed and where the standing order is to be paid. In this way, you are entirely in control of the payments and you can cancel the standing order at any time. However, a standing order doesn’t have the same consumer protections that a direct debit does and if you make a standing order payment incorrectly, there’s no guarantee that you’ll have the money returned. It’s a good idea to set a reminder either on your phone or in a calendar for when you need to cancel the standing order if you don’t set up an end date when creating it.
At Polar Credit, we will collect your minimum payments via continuous payment authority from your registered debit card. If our initial collection attempt fails, we will try again the following day (regardless of weekends and bank holidays). You can also log in and make your minimum payment – and any other additional payments – at any time of the day. Unlike direct debit, we can cancel the CPA within any timeframe, although we would suggest getting in touch at least 24 hours before your payment is due to be collected so that we can ensure the request is actioned before any automated collection attempts.
What is a continuous payment authority?
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