Credit Score Basics > Do bounced direct debits affect credit rating?

Do bounced direct debits affect credit rating?

Wollit Team3 minute read · Updated 23rd July 2024

Yes, missed or bounced direct debits can affect your credit rating. However, the impact depends on several factors. Here is how it works.

Are direct debits good or bad for my credit score?

Overall, direct debits are a great way to make sure that your bills are paid on time, which makes them great for building your credit score as well.

This being said, direct debits can actually have both positive and negative impacts on your credit score. It’s all about how you manage them:

Setting up direct debits ensures bills are paid on time, which shows that you’re a responsible borrower. Maintaining a history of on-time payments over 6 months or more can start to improve your credit score.
Using direct debit to pay down credit card balances is an effective way to improve your credit utilisation ratio as well, which is a major factor in credit scoring models.
However, missing a direct debit because your account balance is low can affect your credit score since it will be reported as a missed payment. A bounced direct debit will also stay on your credit report for up to six years if you don’t clear it straight away.
Also, while a single missed or bounced direct debit payment may not significantly hurt your credit score, a pattern of missed payments could. Lenders view this as a sign of financial irresponsibility.
Finally, failing to inform your bank or the utility company before cancelling a direct debit can also hurt your credit score, as it may appear as a missed payment.

How much do missed direct debits affect credit scores?

The impact of a missed or bounced direct debit on your credit score can vary depending on a few factors:

How much you owe: larger missed payments tend to have a greater negative impact than smaller amounts.
Who you owe: missed payments to lenders like banks or mortgage providers are viewed more seriously than missed utility bills.
When the direct debit bounced: more recent missed payments will have a bigger effect than older ones. Lenders generally look for a clean credit history in the past 3-6 months.
And your overall credit profile. If you have an otherwise strong credit history and low debt levels, then you may see less of an impact from a single bounced direct debit compared to someone with a poorer credit history.

In general, a single missed direct debit is unlikely to cause major, long-term damage to your credit score, especially if you pay the outstanding amount quickly. However, a pattern of missed payments could hurt your ability to get approved for credit in the future. Keep bounced direct debits to an absolute minimum if you can.

How can I prevent bounced direct debits from affecting my credit score?

If you’re concerned about bounced direct debits, here are some tips to prevent them from hurting your credit score:

Set up direct debits a few days after you expect to receive your salary so you can have a buffer in case there’s any delay getting paid.
Try to keep a small amount of money in your account to cover unexpected bills.
Check your account regularly to make sure direct debit payments have gone through successfully.
Check to see if your bank app has a low balance warning system that notifies you before a direct debit is due.
If you need to cancel a direct debit, always inform both your bank and the recipient company. Don’t cancel it without informing them first.
Finally, if a direct debit does bounce, get in touch with the recipient immediately to make sure they don’t report it to the credit reference agencies. Paying the missed amount quickly, even if late, can reduce the impact to your credit score. You might also be able to avoid late fees.

And, of course, keep working on your credit score. The good news is that now there are many apps that can help you build and improve credit. One such app is Wollit.

Wollit works by reporting a fixed-fee monthly subscription as a loan repayment to all credit reference agencies. This helps you build a history of timely debt repayments, which is the main factor that matters for your credit score.

On top of this, Wollit can also report your monthly rent payment to Experian. This can add another line in your credit report that shows lenders you pay your bills on time, helping you reduce the impact of a single bounced direct debit in your overall credit history.