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What is direct deposit? Here’s how it works

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Direct deposit streamlines the process of receiving your salary by enabling your employer to transfer your earnings directly into your bank account. This eliminates the need to deposit a paper check with each payday physically. In fact, according to a 2023 survey conducted by the American Payroll Association, a staggering 95 percent of respondents reported receiving their pay via direct deposit, signifying the waning popularity of paper paychecks.

While the primary advantage of direct deposit is its inherent convenience, many financial institutions offer supplementary benefits to customers who opt for this payment method. These perks can help you save money and access your funds earlier.

What is direct deposit?

Direct deposit streamlines the process by which your employer transfers funds directly into your bank account, eliminating the need for paper checks and providing you with faster and more convenient access to your funds.

How direct deposit works

When you deposit a check into your account, your bank initiates a verification process with the issuing bank to confirm transaction details, such as the check’s amount and the payer’s account balance. This verification can introduce delays, during which you may not have immediate access to the funds.

In contrast, with direct deposit, your employer electronically transmits your pay to your bank in advance of the designated payday, and your bank promptly credits your account on the specified date. This means that on your payday, your funds become available in your account, allowing you to access and use them immediately.

Several employers offer the flexibility to divide your direct deposit into multiple accounts, enabling you to create an automated savings strategy. As an example, you can instruct your employer to allocate $50 from each paycheck to your savings account, while the remaining portion goes into your checking account. This convenient feature assists you in growing your savings without the need for manual fund transfers.

How to set up direct deposit

The process of setting up direct deposit may vary slightly depending on your employer, but your human resources or payroll department can provide assistance with the initial steps.

To establish direct deposit, follow these steps:

  1. Request the direct deposit form from your employer. This form will require your personal information, including your name, address, and Social Security number.
  2. Provide the bank’s routing number and your checking account number. The routing number, comprised of nine digits, informs your employer which bank to send your funds to. It can typically be found on a paper check in the lower left corner and starts with a 0, 1, 2, or 3.

Your checking account number serves as a unique identifier for your bank account. Similar to the routing number, your checking account number is typically located at the bottom of your paper checks, appearing as the second set of numbers directly to the right of the routing number.

Furthermore, you can often find your routing and checking account numbers within your online banking portal.

3. Offer a voided check when required. Certain employers may request a voided check to verify your account details. If you are setting up direct deposit in person, having your checkbook on hand is advisable.

To void a check, just write “VOID” in large letters across the check or multiple times in key areas, such as the payment amount box, payment amount line, payee line, date line, and signature line. You may also choose to write “VOID” on the back of the check if desired.

How long does direct deposit take?

After you’ve completed the direct deposit setup process, it may require one or two pay cycles for your direct deposit to become active after you’ve submitted the necessary form to your new employer for processing. During this time, you will likely continue to receive paper checks.

Once your direct deposit is established: Typically, it takes one to three business days for the funds to reflect in your account with each pay cycle once your bank receives the payment from your employer.

Nevertheless, some banks, including Capital One, Chime, Current, Fifth Third Bank, and Varo Bank, offer early direct deposit services, making the funds available to you up to two days before your official payday. These banks opt to release the funds once the transaction clears, eliminating the need to wait until the scheduled payday.

Perks your bank provides for direct deposit

Banks often extend multiple benefits to customers who establish direct deposit arrangements for their checking accounts.

A prevalent benefit is the exemption from maintenance fees. Certain banks impose monthly fees on checking accounts, but these fees may be waived if you maintain a specified balance or establish recurring direct deposits.

In addition, some banks provide elevated interest rates on checking or associated savings accounts when specific criteria are met. These conditions may encompass making a minimum number of debit card transactions or receiving regular direct deposits.

Bottom line

Establishing direct deposit is generally straightforward, offering the advantage of bypassing the need to collect and deposit a physical check with each payday. Beyond its speed and convenience, direct deposit often brings additional benefits from your bank, including early deposit options, the ability to split deposits, and potential waivers of monthly maintenance fees.

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