What’s the Difference Between Standing Orders & Direct Debits?

Are you looking to automate your payments? That’s a wise choice! Not only does automating payments make your life easier, but it can also give you a consistent payment history—one of the key factors influencing your credit score. But which type of automatic payment should you use?

If you’ve been doing some digging, you may be aware of two common ways to automate payments: standing orders and direct debits. In this post, we’ll explain the differences between the two and tell you everything else worth knowing:

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A standing order will automatically pay a fixed amount at a specified time. You specify the bank account that the standing order will be sent to. Standing orders are useful for recurring payments that don’t vary, such as rent, or monthly charitable donations.

What Are the Pros and Cons of Standing Orders?

Pros:

• You Have Full Control: Standing orders only ever send the amount you’ve approved to the account you’ve specified.
• Can Be Useful for Saving: If you know when you get paid each month, you could strengthen your savings by creating a standing order to automatically move a specified amount to your savings account.

Cons:

• Total Lack of Consumer Protections: Standing orders are like cash in a way: once you send it, it’s out of your control. You can’t challenge a standing order if you send it to the wrong person, so it’s vital that you have the right bank account information before you set one up.
• Potential for Fees: If your account doesn’t have the funds to cover the direct deposit, you could be charged a fee by your bank. Additionally, this could push you into your overdraft, where you could accrue interest on the borrowed money.

Related read: What Happens If I Can’t Pay My Overdraft in the UK? 

How Much Does a Standing Order Cost?

There’s no fees for setting up standing orders, making them a cost-effective way to manage payments such as for rent.

A direct debit is another method of making automatic payments. With a direct debit, you authorise a business or other billing organisation to withdraw your payment. Most businesses like mobile and utility providers will give you the option to enrol in direct debits to automate your monthly payments.

What Are the Pros and Cons of Direct Debits?

Pros:

• Simplify Your Bills: When you sign up for direct debits, you eliminate the need to log in each month to pay your bills. Because they help you avoid missing payments, direct debits can even protect and help build your credit score!
• Risk-Free: Unlike standing orders, if something seems wrong with a direct deposit, you can dispute it through the Direct Debit Guarantee. Additionally, the amount you’ll be charged will always be made available to you ahead of time, allowing you to have an accurate view of upcoming bills. 

Cons:

• Requires Some Monitoring: While direct debits certainly simplify your finances, they’re not fully automated. You’ll need to ensure there are ample funds in the account they draw from; otherwise, you could face failed payments or overdraft charges, both of which could damage your credit score. Fortunately, this still requires far less time and attention than manually paying each individual bill.
• Credit Cards Could Build Credit Faster: Direct debits are convenient and safe, but outside of ensuring that you don’t miss payments, they don’t directly impact your credit score. If you can put a smaller payment on a credit card without taking your credit utilisation ratio into dangerous territory, you may be able to build credit more effectively.

How Much Does a Direct Debit Cost?

Like standing orders, direct debits are free to set up, and some billing organisations may even offer a small discount for enrolling in direct debits. However, keep in mind that if your account doesn’t have sufficient funds, you could be charged a fee or go into your overdraft.

To summarise, standing orders and direct debits are both ways of automating payments, but with some crucial distinctions and different uses.

Standing Orders

• Standing orders send specific payment amounts at specific times.
• They’re created, managed, and cancelled completely by you.
• You don’t have any protection in the event you mistakenly send a payment to the wrong account.

Direct Debits

• You enrol in direct debits through your account with the billing organisation, such as a utility provider or mobile network.
• Direct debits often vary slightly in cost each month, depending on your balance, but the billing organisation is required to let you know what you’ll be charged ahead of time.
• Protections are in place in the event a direct debit is billed on the wrong day, for the wrong amount, or for any other issues.

1. Monitor Your Direct Debits and Standing Orders

Regularly check your account to make sure that your direct debits are for the right amount and at the right time. If they’re not, you can raise a dispute with your bank. 

Make sure that your standing orders are for the correct amount, and that you update them in the event of a rent increase or another change in how much you need to send. Finally, cancel them promptly when you don’t need them any longer, as standing orders are completely non-refundable.

2. Sign Up For Overdraft Alerts From Your Bank or Building Society

Both standing orders and direct debits are only effective if you have enough funds in your account to cover them. With overdraft alerts, you’ll get notified in the event that you’re about to enter your overdraft. This will let you know you need to add money to your account so your direct debits or standing orders go through successfully.

3. Download the Pave App

Pave connects to your accounts and lets you know when you have bills coming up so you can ensure your accounts have the funds to cover them. If you don’t, we may be able to extend you a line of credit that not only covers your bills, but actively helps build your credit score.

Even if you don’t need a line of credit, Pave will assess your credit file and give you simple, personalised credit fixes that may improve your credit score and could save you thousands of pounds throughout your life. Ready to see the credit fixes that Pave has for you? Download the app from Google Play or the App Store to get started!

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