Will Direct Debits improve my credit score?

If you’ve got a mobile phone contract, a monthly subscription (ahem or several. Think Netflix, Disney, or that Apple charge you keep forgetting to cancel), or a gym membership etc, you’ll likely already have at least one Direct Debit set up on your bank account.
Direct Debits can help you manage your money more effectively, save you time, and avoid the hassle of having to make manual transfers again and again.
If you struggle to keep up with different payment due dates, Direct Debits can also be a great way to make sure you stay on track.
But the big question is: do Direct Debits affect your credit score?
Let’s dive in.

What is a Direct Debit?

A Direct Debit is an automated way to pay for things. They can be used by both individuals and businesses, and are particularly useful for managing recurring payments that need to be paid on a set date each month.
You might have Direct Debits set up to pay for your electricity bill, cover any memberships, pay for your phone contract, or to split the cost of a large purchase like a new sofa or dream holiday over time.

How do Direct Debits work?

If a business or organisation can accept payments by Direct Debit (and you choose to use that way to pay) they’ll give you a Direct Debit Instruction to set it up. You don’t need to visit the company in person to set up a Direct Debit, the Instruction can be processed online, over the phone, or on paper.
The Instruction serves as a formal notice to your bank. It tells them you’ve agreed that this business or organisation can request payment from your bank account and that the bank has your authority to pay it.
You’ll also usually be able to nominate the day you’d prefer the money to leave your account each month. (This way you could set up all your Direct Debits, so they’re taken out the day after payday.)
The Direct Debit Instruction should include a few key details:

  • The name and address of the business or organisation you’ll be paying
  • Your name and address
  • Your bank account details
  • The date the agreement was made
  • A reference number for the payment

You’ll also be protected by the Direct Debit Guarantee. While you’ll still be responsible for paying for goods or services you’ve received, this guarantee means the bank will refund your money if something goes wrong with the transaction.
You can cancel a Direct Debit at any time, but it’s best to let the business or organisation know first (we’ll explain why later).

Do Direct Debits affect your credit score?

While having a Direct Debit won’t affect your credit positively or negatively, the service it offers can help boost your credit score.
When you opt to pay by Direct Debit, this won’t be recorded on your credit report and won’t be visible to other lenders. A credit check isn’t usually required for Direct Debit either.
Thanks to the automated nature of Direct Debit payments, you can pretty confidently say “so long” to missed or late payments that could negatively impact your credit score. This also shows lenders that you can pay your bills on time over a long period. 

If you hold a balance on your credit card, having a Direct Debit in place to pay down a certain amount each month could also help improve your credit score by keeping your overall credit utilisation low.

How does cancelling a Direct Debit impact your score?

You can cancel a Direct Debit at any time by contacting your bank. Several banks and building societies let you cancel Direct Debits through online banking in just a few clicks.

Cancelling your Direct Debits won’t have any direct impact on your credit score, but it might make it more difficult to keep up with your regular payments. Without a Direct Debit in place, you’ll be responsible for making the payment to the correct place, on the correct day, and with the correct amount to avoid ending up with a late or missed payment  - and that could harm your credit.

You cancel a Direct Debit without letting the business or organisation that collects it know,  sure an alternative payment method is in place so you don’t face extra penalties or charges.

What happens if I miss my payments?

Direct Debits rely on there being enough money in your nominated account to make the requested payment on the set due date. If you don’t have the funds available, your bank will usually contact you to let you know that the payment has failed and set a deadline for you to top up your account, often later that same day.
If the bank chooses to make the payment despite there not being enough funds, you might have to pay an unpaid transaction fee or extra charges for entering your overdraft. However, if they don’t make the payment, the company expecting to receive it could mark it down as a missed payment and report it to the credit reference agencies, negatively impacting your credit score. They might also take steps to recover the missing money or ask you to pay a penalty for late payment.

FAQs about Direct Debits and credit scores

What can I do to improve my credit score?

Whether you have good, bad, or somewhere-in-between credit, your score is never fixed. While it’s not an exact science and different factors can affect your credit differently, you can take steps to improve your credit score over time including:

  • Registering on the electoral roll
  • Make debt payments in full and on time
  • Check your credit report regularly and act quickly to get any errors removed
  • Minimise the number of hard searches you have in a short time
  • Keep your credit utilisation percentage low
  • Make sure you’re not financially linked to people with bad credit scores

What are better ways to build credit?

Having a Direct Debit in place can help you ensure you don’t miss any payments and risk harming your credit score. Making regular payments on time each month for a while could also boost your score over time.
If you’d like to move the needle more significantly, consider using other types of credit and managing them responsibly. Direct Debits can help you broaden your credit profile if you have them set up to pay your credit card bill, make your car finance repayment, cover your phone bill, or pay your mortgage payment.