Direct deposit is a
form of payment in which one party electronically transfers funds to another's
financial account. With direct deposit, you don't have to deal with paper
checks, or the hassle of depositing your check and waiting for the funds to be
ready to use.
Many companies allow
direct deposit for their employees, and some may even require it: but they
can't specify which bank employees must use to receive the deposit. It's common
that you can also choose direct deposit for other types of payments, such as
tax refunds, retirement funds, unemployment benefits, or Social Security
benefits. If you've set up direct deposit to your checking or savings account,
you can even split your paycheck between more than one account, giving you easy
access on or before payday.
How does direct deposit work?
To transfer money
through direct deposit, financial institutions use the Automated Clearing House
network (ACH), an electronic payment system that facilitates money transfers.
Once your business has
your bank account details, you can initiate payments based on your paycheck
details. At that point, the money is transferred from the company's bank
account to yours.
As soon as that money
is deposited into your account, it is typically immediately available for
withdrawal or use with a debit card. This is very different from depositing a
paper check, in which case your bank may hold some of the funds to verify that
the check is valid.
What do I need to do direct deposit?
If you want to receive
your salary via direct deposit, you will need to confirm that your company
offers this service and provide your bank account details to your employer's
payroll administrator. You may even be able to do the process online through
your company's payroll portal. In some cases, your employer may ask you to
provide a voided check to confirm your routing and account numbers. Here are
some of the personal details you'll typically need to provide (some of which
are on the bottom of your checks).
●
Your name
●
Account number
●
Route number
●
Account type (checking or savings)
●
Name of the bank
● Bank address
Depending on how
quickly your company processes the information and when your next pay is due,
you may receive a paper check during an additional pay period before your direct deposit is set up. Check with
your payroll department to make sure you understand the deadlines.
What are the advantages and
disadvantages of direct deposit?
Although there are
some clear advantages to using direct deposit instead of paper checks, there
are also some potential drawbacks that you could run into over time.
Here are some of the
advantages of direct deposit.
●
Usually Free: Financial institutions or payers
typically don't charge for directly depositing funds into your account.
●
You'll save time: You won't have to run to the
bank to deposit or cash your check after work, which can be especially
difficult if you leave work shortly before your local branch closes.
●
Quick Access: Your bank or credit union
generally won't hold your direct deposit – as soon as it arrives in your
account, it's available for your use. In fact, banks are required by law to
make directly deposited funds available to you no later than the business day
after the business day the deposit was made. This can help you access your
funds more quickly.
●
No paper checks: Checks can easily be
misplaced or lost, and if that happens, you'll have to wait for your company to
stop payment on the check and issue a new one. With direct deposit, there is no
paper check.
● Flexibility: Depending
on your company's policy, you can divide your salary between your checking
account and your savings account. This could come in handy if you want to
automate your savings.
On the other hand,
these are some of the possible disadvantages of direct deposit.
●
If you change banks, you'll need to change
direct deposit: Changing banks means you'll have to go through the direct
deposit setup process again. If your company offers online access, you may be
able to do this yourself, otherwise you'll need to arrange it through your
payroll administrator.
●
Bank accounts aren't available to everyone: In
2017, more than 8 million households were “unbanked” (no access to banking
services), according to the Federal Deposit Insurance Corporation (FDIC). If
you do not have a bank account, you will not be able to participate in your
company's direct deposit program.
● Direct deposit
advances could be expensive: If your financial institution offers a direct
deposit advance, you can get money from your next direct deposit before it
reaches your account. But keep in mind that the next deposit will be reduced by
the amount of your advance, and could be accompanied by high fees.
Is direct deposit safe?
Direct deposit is a safer alternative to depositing with paper checks, since the money goes directly into your account and there is no danger of losing a check or having it stolen. But it's probably a good idea to check with your payroll administrator to find out what happens to your bank account details once you give it to them. Signing up for direct deposit online can reduce the risk of someone copying your information that appears on paper.