Do Direct Debits Improve My Credit Score?

Your credit score can influence your whole financial life. A low credit score can restrict your access to good interest rates or even inhibit you from borrowing if you want to take out a mortgage, buy a car on finance, or even get a phone contract. 

Because the different credit bureaux use their own systems, there are no established ways in which your credit score is calculated. That's why the general rule for maintaining your credit score at a high standard is making sure your financial life is healthy at all times. You can do this in lots and lots of ways, like never missing a payment on credit, or not requesting too many loans at once. But what about direct debits? Do direct debits affect your credit score? Let's find out. 😊

Everything You Should Know About Your Credit Score

Your credit score is a rating assigned to you that indicates to finance providers your capacity to repay loans on time.  It's an indicator of risk that determines anything from how much credit you can get to your interest rate. It is basically used to limit any risk of you not paying back your loans.

Getting credit is how you improve your credit score. A common misconception is that not using any credit is the best option. While paying for purchases with money you've saved is frequently the most logical approach as a buyer, it's crucial to keep this balanced with the need for a positive credit history. Your credit score cannot be calculated in a single way. 

Of course, some organisations have created their own systems, but with so many players in the UK, your credit score isn’t the universal source of truth to assess your financial health. It is an important factor though, so it’s important to constantly keep an eye on it and take the necessary steps. 

Any of the three credit agencies in the UK can show you your credit history. Based on the information available to them, each agency creates its own credit report. This means that your report may differ from one credit bureau to the next based on the data they have on file for you.

Do Direct Debits Improve Your Credit Score

Maintaining current and on-time credit payments will demonstrate that you are a trustworthy borrower. This is due to the fact that regular payments, such as Direct Debits or mobile phone contracts, provide credit agencies with information about your spending habits. If you reimburse them in full and on time, it demonstrates that you are good with money.

That's why direct debits can help your credit score. Because direct debits eliminate the possibility of forgetting to make the payment for a bill on time, late payments are no longer an issue. A mere six months in which you pay all bills on time could be enough to start improving your credit score. Because direct debits are automated, this ensures that your bills are paid on time.

When you make payments late, or when you miss them entirely, it can lower your score and remain on your credit history for a maximum of six years. That's why settling bills on time every month is critical. Setting up direct debits for each and every one of your payments will avoid missing one by accident. Unpaid and ignored debts could result in a County Court Judgement (CCJ), which can have a truly negative impact on your credit file.

So do direct debits increase credit score? Well, indirectly, yes. The act of using direct debits won’t immediately increase your credit score, but at least it will eliminate the risk of your credit score being harmed by missed payments. And that’s a great thing indeed! Just keep in mind that a direct debit will only be useful if you have enough funds in your account.

Cancelling Direct Debits - What Happens For Your Credit Score? 

Direct debits are very easy to cancel, which is part of what makes them so convenient. To do so, you’ll need to contact your bank. Most people now prefer the convenience of online and phone banking, which makes it easy to cancel direct debits.  If you don't have internet banking, to avoid any confusion, it is advisable to ensure that the decision to cancel the direct debit was made in writing, in the form of either a letter or an email to your bank.

You must also notify the payment's recipient that you have cancelled the direct debit. If you don't, and your payment just stops from one day to the next, you may be subject to penalties or charges. Make sure you are not tied into a rolling contract or need to give notice before you cancel the direct debit. Furthermore, failing to notify your bank or the recipient of a cancelled direct debit will negatively impact your credit score.

The Bottom Line

A late or missed payment is sometimes unavoidable in life. For example, if you cancelled a Direct Debit without informing the recipient institution, or if you were simply unable to pay. The degree to which your credit score will be harmed is determined by several factors, including your prior history and the time it takes you to make the missed payment in the end. If you missed a payment for a good reason, it's always worth speaking to the lender to explain - in some cases they may not put a mark against your record.

You don't have to handle improving your credit score alone. Speak with your lender about your circumstances if you're having trouble making credit card payments or if you're experiencing other money troubles. They may be able to assist you in getting back on track by making suggestions such as changing due dates and eliminating the hassle of having to remember when to make payments by setting up a Direct Debit. 👍