Do direct debits affect your credit score? It’s complicated

Wondering if direct debits affect your credit score? They don’t — at least, not directly. However, direct debits can affect your credit score in a more roundabout way. It ultimately depends on the payment you’re making. We know that can be a little confusing, so we’re here to break it down and get you the answer you’re really looking for.

Here, we’ll take a closer look at the relationship between direct debits and your credit score. By the end of this article, you’ll come away with a deeper understanding of that relationship and how you can take advantage of it to build and protect your credit score. Let’s get right to it.

What are direct debits?

Direct debits are payments made directly from your current account. That is, you have the funds in an account, and you’ve authorised an entity (like a utilities provider or phone carrier) to charge that account.

The entities that charge you via direct debit must send you a bill prior to pulling the funds they’re entitled to.

How direct debits can affect your credit score

You might assume that direct debits don’t affect your credit score because they aren’t a form of credit, and that’s half right. However, your credit score can be affected by many things unrelated to credit lines like loans and credit cards.

How direct debits can help your credit score

A huge benefit of direct debits is that they’re automated. You can literally set it and forget it, with your bills being paid on autopilot. This can help your credit score, because your payment history is the single-most important factor influencing your credit score.

Direct debits protect your payment history by helping you make timely payments and removing the possibility of forgetting.

How direct debits could hurt your credit score

Admittedly, the damage to your credit score in this instance isn’t necessarily due to direct debits. Rather, it’s a result of the accounts they’re attached to. As we mentioned, your payment history is critical for building a strong credit score. However, if your current account’s balance drops below the value of the direct-debit payment, you could be facing a missed payment.

Missed payments have a negative impact on your credit score and can be visible in your credit report for as long as seven years! The point of a direct debit is to prevent that from happening, but if your account balance has dropped, you could see that negative outcome if you haven’t adjusted.

If you don’t have the funds for a direct-debit payment, you might dip into your overdraft. Using your overdraft won’t necessarily impact your credit score, but it can. If you have an arranged overdraft, that is a form of credit, and you’ll need to then pay it off promptly and in full to avoid carrying a balance and accruing interest on it.

Being pushed into your overdraft could also impact your credit score by changing your credit utilisation rate. Ideally, you should aim to use no more than 25% of your available credit at any given time. Using more than that can indicate you’re struggling to get by. So, if you’re around the 25% threshold when a direct debit is pushed to your overdraft, your credit utilisation rate could increase, causing your credit score to decrease.

Related read: Do overdrafts affect your credit score?

The bottom line on direct debits and your credit score

At the end of the day, direct debits are a brilliant tool for protecting your credit score. While the payments you make by direct deposit typically won’t build your credit score, they’re crucial for protecting your credit score. Protecting your credit score is just as important as building it.

Direct debits can damage your credit score, but that’s ultimately an effect of your current account’s balance, rather than your direct debit.

It’s usually a best practice to set up direct debit for any bills that can be paid that way. That reduces the mental burden of remembering your monthly payments and reduces the likelihood of missing a payment and damaging your credit score.

Protect your credit score with Pave

Pave’s Bills Alerts feature can help you keep track of where your current account balance is and what bills you have coming up. With insights that make tracking your bills effortless, you can rest assured knowing that your current account has the funds to handle upcoming direct debits.

Plus, unlike direct debits, Pave can help grow your credit score. Our credit builder accounts can boost your payment history by reporting your payment behaviour monthly, helping you take your credit score to the next level.

Want to see for yourself why 99% of Pave users with good credit habits improve their scores? Download the app today!

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Pave cannot guarantee an increase in your credit score. Some features subject to eligibility.