Setting up Direct Debits
This week I look at making your life easier and your bank balance healthier, by using direct debits to the maximum.
But let’s get our terminology straight before we start. As well as direct debits (where a company draws money from your bank account), there are also standing orders (where you tell your bank to pay out a fixed amount each month). These are now less common than direct debit, but they’re perfectly safe as you can stop them any time you like – they’re also good for paying regularly into a savings account.
The one to seriously avoid is ‘recurring payments’, typically where you give your Credit Card details for a magazine subscription or the like. Be aware that you’re giving the company carte blanche to keep drawing cash from your account, and you don’t have the same protection as under the Direct Debit scheme, which is strictly regulated.
Okay. Direct Debit Saving number one: Providers will give YOU a discount for putting things on direct debit. Gas and electricity providers should be offering you a discount of around 10%,
The reason they give that discount is that bills are based on estimated usage – and they tend to be higher than your actual usage, thereby leaving you in credit. They have that as security and also earn interest on your money. It’s a small price to pay, as your discount is more than the interest your money would otherwise have been earning in your bank account. But to SAVE the maximum, send back regular meter readings to the provider and get your DD reduced if it’s too high.
At the same time of course, CHECK that you are using the cheapest provider. I’m not in favour of continually switching power providers as that just eats up in time what you save in money – once a year is enough to check you’re getting the best deal.
Direct Debit savings with phone and broadband providers tend to be smaller, but they can still be saving you lots of time and headaches. The great thing about direct debits is that they are for a variable amount. Where they can REALLY score is paying off your credit card bill each month. ALL OF IT. You don’t need to worry if you’re going to be paying interest on a purchase you missed. This will save you a packet … trust me.
Whatever you do, don’t set up your Direct Debit for the minimum credit card payment each month … that way you’ll just be running up interest and servicing the debt.
And don’t assume direct debits are good for everything. Insurance of all types is one financial area where you’ll usually pay MORE by not paying the premium upfront. If you can afford to pay the whole lot now, it’s usually worth doing so. Do the sums on monthly or one-off payments before you sign the agreement. The TV licence is also cheaper to pay upfront. Another thing to beware is a Direct Debit taking you into overdraft. If your current account is running low, you could risk fines from your bank if that moneysaving debit takes you into the red.
Saving number two: The old cliché has it that time is money, and you can save LOTS of time by putting ALL your regular and unavoidable expenses (gas, council tax and the rest) on direct debit. You’ll also save all the time and worry of missing payments, and the possible fines that accrue, and you’ll save many hours a year hunting through paperwork, writing cheques and trucking off to the post box. Now spend that time on something you enjoy doing instead!
Saving number three: CANCEL direct debits. No, I’m not contradicting the first point. The fact is LOTS of us set up debits for things then forget all about them. The problem with direct debits is that they ARE SO convenient. You set up a charitable giving direct debit years ago and, because you never look at your bank statement, you’ve never noticed the five pounds a month trickling from your account.
Common mistakes I’ve found are people having two lots of travel or other insurance (and this is money you’ll never get back), and simultaneous subscriptions to the AA and the RAC. Do an audit of your direct debits – your bank will be able to provide you with a list of the ones you have running on your account. Then cancel any that are doing you no good, but simply leeching money from your account each month.
Okay, now we’ve cleared the real junk, let’s look at the rest of your direct debits and regular payments. Do you really need Sky? Or that monthly subscription to Amazon DVD rental? Or the gym membership you never use? Why not work out how much they’re costing you each month, cancel the direct debits and spend the money on something you REALLY want.
Better yet, set up a standing order for that money you saved, putting it into a high interest monthly savings account. You’ll never notice it but you’ll have a steadily growing fund earning good interest.
Links: Tesco Clubcard, Direct Debit