What Are Direct Deposits?

Definition & Examples of Direct Deposits

Employee checking her bank statements for paycheck direct deposits.
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kate_sept2004 

Direct deposits are a way for your employer to put your paycheck directly into your bank or credit union account. They eliminate the need to cash a paper paycheck and reduce the risk of lost payments.

Find out more about the advantages of direct deposits.

What Are Direct Deposits?

Direct deposits are electronic payments to a person's bank account without the need for cash or a paper check.

The most common use of direct deposit is with paychecks. However, it can happen with nearly any payment that you receive. If you have your tax refund directly deposited to your account, you can speed up the amount of time it takes to receive your refund.

Many businesses are set up to do direct deposits through their banks. You may also have one-time payments directly deposited to your account. Federal benefits or unemployment pay may also be paid as a direct deposit.

Receiving your pay via direct deposit also allows you to set up automatic transfers into a savings account to grow your savings.

How Direct Deposits Work

To sign up for direct deposit of your paycheck, you need to talk to someone in your human resources department. Usually, it is offered when you first begin working, but you can also sign up at any time. There may be a waiting period before your first direct deposit starts because it takes time to process the paperwork.

You will need to provide the bank name, the routing number, and the account number for your account in order to set up the direct deposit. Sometimes you can accomplish this by bringing a voided check to human resources. (If you don't have a bank account, you may be able to receive your pay as a payroll debit card.)

For example, say you've just been hired to work for a new company. As part of your new-hire paperwork, you'll probably receive a direct deposit signup form. On the form, enter your bank or credit union name, routing number, and account number, and indicate whether you'd like your whole check or a portion of it to be directly deposited to your account. Return the form to the correct department (usually human resources).

Your first one or two paychecks may be delivered to you on paper, but after that, you should receive your pay as a direct deposit beginning with the next pay period and continuing until you cancel it.

When you close your checking account, you will need to change your account number with your employer. Pay attention to how long it takes to process the paperwork, and allow that amount of time before you close the account. It is usually a good idea to leave that account open until the direct deposit has successfully been transferred to your new account.

Some businesses have an employee credit union and may require that you have your check direct deposited into that account. If you prefer to keep your money at a different bank, you can set up a transfer or simply withdraw the money on the day it is deposited to your credit union account. 

Advantages and Disadvantages of Direct Deposits

Advantages
  • Saves a trip to the bank

  • Funds are immediately available

  • Safer and faster than checks

Disadvantages
  • Money would cover an overdraft

  • Out of sight, out of mind

Advantages Explained

  • Saves a trip to the bank: Direct deposit can make handling your finances much easier. It limits the number of trips that you need to make to the bank since your money is put into your account automatically.
  • Funds are immediately available: Direct deposit will also prevent holds being placed on your account for large deposits since the funds are immediately available when they are transferred. 
  • Safer and faster than checks: Your funds will automatically go into your account with no action required from you.

Disadvantages Explained

  • Money would cover an overdraft: The main disadvantage of direct deposit is that if you have overdrawn your account, the money you deposited will be used to cover the overdraft.
  • Out of sight, out of mind: It is important to check that the deposit actually went through before you spend the money. Sometimes mistakes are made, and you do not want to deal with overdraft fees because you spent the money before it came.

Key Takeaways

  • Direct deposits are electronic payments sent directly to your checking account.
  • Direct deposits are frequently used for paychecks, as well as benefits, tax refunds, or one-time payments.
  • Setting up direct deposit ensures that your paychecks are automatically deposited to your account, ready when you need them.

Article Sources

  1. IRS.gov. "Get Your Refund Faster: Tell IRS to Direct Deposit your Refund to One, Two, or Three Accounts." Accessed Sept. 6, 2020.

  2. Consumerfinance.gov. "Should I Enroll in Direct Deposit?" Accessed Sept. 6, 2020.