I thought I’d write an opinion on the dreaded phrase in our office for the past year – DDs. Now, before I go on I think Direct Debits are an excellent solution to paying bills in modern day life but I will be happy if I never hear the words again.
My company sets 4 “business targets” every January and for each one we achieve we get a 1% bonus each February of the following year. Of course, you don’t need to be a mathematical genius to work out that if we achieve all 4, that’s a 4% bonus in our pay packets early next year. It’s not going to enable me to retire but it is going to be an extra few hundred pounds just as the Christmas bills come in, so it is certainly not to be sniffed at. And you may have guessed by now that one of the targets was to have a certain number of our customers set up on a fixed monthly direct debit – 7000 a week would ensure we reached our target by the end of the year.
And I’ll explain my title later.
WHAT IS A DIRECT DEBIT?
A direct debit is a monthly payment that goes straight out of your bank account and pays the company with which you have set up the agreement. Most of my bills are paid in this way, for example council tax, mortgage, gas and electric, water… the list is almost endless. With each of these bodies I have agreed a fixed amount and the date on which it is to disappear from my account – usually within the first week of being paid, if I can help it.
ARE THERE DIFFERENT TYPES OF DIRECT DEBIT?
There are 2 types of direct debits that are available, a fixed direct debit and a variable direct debit. If there is an option, a fixed direct debit is easier to budget for. For example, my direct debit for my water is exactly the same every month. That means I know that on the 22nd of each month, Severn Trent Water will take the amount that I have agreed. This cannot change without at least 7 working days notice, therefore it is fixed.
However, I pay my phone bill on a variable direct debit. This means that whatever the bill comes to, that is the amount NTL will take. Of course, this is harder to budget for as some months it can be as low as £7 and others as high as £20. Credit card bills are usually paid this way to, with the company taking the minimum payment on a direct debit. The company should send you a statement with the amount they are going to take well in advance of
the payment being made so you can make sure funds are in your account.
CAN I CHOOSE HOW MUCH I WANT TO PAY?
This depends on the company and what the bill is for. I pay my council tax on a fixed direct debit but they tell me how much this is going to be to cover the annual bill, therefore I have little choice in how much this is going to be.
With my gas and electric there was a little more leeway, but you must remember that however much you pay, this must cover your consumption. It is no good telling your electric company that you will pay £10 a month for electric if you actually use £50 a month. You will soon end up with a hefty bill to pay. Usually the company concerned should be able to give you a rough estimate based on previous consumption which you can then use to haggle to an amount both parties agree with.
And with my mortgage, although they give me a minimum amount I must pay, I can choose to pay anything above this to get it paid off more quickly.
WHAT ARE THE BENEFITS OF PAYING BILLS IN THIS WAY?
The most obvious benefit for me is that I haven’t got to find time to write a cheque, and then find a stamp to post it or get to the bank before it closes. In other words, I know all my bills will be paid in any given month with very little hassle to me.
And because everything will be paid, I’m never charged late penalties or threatened to be cut off because I’m in arrears, so it works out as a safety net for me. The companies are happy because they know they’re going to get their money and I’m happy because I very rarely have an unexpected bill that I haven’t budgeted for. Red bills are a thing of the past and my credit rating remains intact, which of course is useful for loan and mortgage applications.
A further benefit is that you are covered by the Direct Debit Guarantee which basically means that if a mistake is made by your bank or the company you are paying, you will be refunded directly.
At work, we had an instance in June where a batch of customers paying by Direct Debit had their monthly amounts taken 3 days running, but within a week all these customers were refunded the money that shouldn’t have been taken, along with a payment to cover any bank charges they may have faced through not having the funds in the bank and in some cases compensation for the inconvenience caused by the error. Because of this guarantee it is a safe way to pay your bills.
ARE THERE ANY DISADVANTAGES?
I suppose the main disadvantage is that you will incur bank charges if the company requests the direct debit and the bank is unable to release the full amount. There isn’t the 5-7 working days grace that you get while a cheque is being cashed. However, because in most cases you can choose the date when you would like the payment to go out, this can be avoided by choosing the date nearest to when money goes into your account. For example Paul is paid on the 22nd of the month and I’m paid on the 24th. This means that when I’m setting up a direct debit, I always choose these dates for it to be taken. Very few direct debits leave our account in the middle of the month when we may be starting to get a bit low on cash.
It can also be difficult to budget for monthly direct debits if you are paid weekly or if you are self-employed and have a fluctuating income.
Finally, you may have a bank or building society account which doesn’t allow direct debits to be taken. Most current accounts do allow direct debits though, so if you have never paid anything in this way, then check with your bank that your account has that facility. And this may be obvious but give the correct details to the company concerned – I once tried to set a customer up on direct debit and when the sort code and account number didn’t match, I asked her which bank it was. Her reply? Legal & General!
WHAT ARE THE MYTHS ABOUT DIRECT DEBITS?
“Money will be taken from my account without me knowing” – no, quite the opposite. When you write a cheque or pay cash at the bank you can only estimate the exact date the money will clear. On a direct debit you have a specific date on which the money will leave your account.
“The company could change the amount they take without my knowledge” – no. Because of the Direct Debit Guarantee, companies are obliged to tell you of any changes at least 7 working days in advance, giving you time to either make sure funds are in your account or to speak to the company and change it back to the original amount.
“The company will take too much money and earn interest in their account” – the business can only take the amount agreed. Sometimes, this may involve a credit building up on your account, especially when paying for your utilities. In the summer, you use less gas and electricity but are paying a fixed amount. It is normal for a credit to build up so that the heavier winter bills are also accounted for. If at the end of the winter you still have a large credit, then you may be paying too much and can reduce your payments, as well as request a refund of overpayments. A refund will then be returned into your bank account usually within 3-5 working days, which is quicker than having to cash a cheque.
CAN I GET DISCOUNTS FOR PAYING BY DIRECT DEBIT?
Companies who want to give customers an incentive to pay by direct debit rather than cash or cheque may offer some kind of discount. The most common businesses to give discounts are utilities and phones. Both NTL and my mobile phone company charge £2 extra for administration costs by paying your bill by any other means but I get my biggest discount for paying my gas and electricity by direct debit. I have both with one company and by paying for each of them by direct debit, they give me £2.50 per product, per quarter credit on each statement. I also have both products billed to me on the same bill for which I receive a further £1.20 credit per quarter, adding up to £6.20 a quarter off my bill. Not a bad saving for paying in a way that is easier for me too.
Of course, as mentioned earlier, some bodies only offer you a fixed direct debit to help you spread the cost, including TV licence, loan repayments or council tax. In these cases a discount is very rarely offered. Although, of course, you are always saving postal or travel costs, and eliminating extra charges for not paying bills on time.
WHY DO SOME COMPANIES OFFER THESE DISCOUNTS?
The easy answer is that it is cheaper for businesses to take a direct debit than cash a cheque. Administration charges are minimal so they want the majority of customers to pay in this way to keep their costs down. Because of the reduced charges they can afford to offer the discount as an incentive.
Cash flow is also an important aspect of running any business and by having customers paying monthly, they know how much money will be coming into the business in any given month. They also save money on chasing debt or losing money by writing off bad debt. So with all this combined, it makes good business sense to have as many customers as possible paying by direct debit.
IS IT EASY TO SET ONE UP?
Most companies are happy to set up a direct debit over the phone – no forms to fill in, nothing to sign. They will ask for your sort code, your account number, your account name and the day on which you wish to pay. Any direct debit set up over the phone should be confirmed in writing so that you are happy that the details you have provided are correct. If a company doesn’t offer to send you written confirmation, then ask for it.
If you would prefer to sign something to set it up then a mandate can be sent to you. A mandate asks for pretty much the same information as above but you also need to know your bank address which can be found on your bank statements or cheque book.
The only time I was unable to set a direct debit up over the phone was with my mortgage company as they required a mandate.
WHAT IF I MOVE HOUSE OR MY CIRCUMSTANCES CHANGE?
If your bank details change then all the companies you pay direct debit to will need to know your new details. Again modifications such as this can be done over the phone with most companies, although some may require written confirmation before any changes are made.
Moving house shouldn’t affect the majority of your direct debits, for example loan repayments, and most companies will just need to know your change of address for their records. But there are some instances where it can make a difference, the most obvious being your mortgage. A house move is probably going to result in a change in the amount needing to be taken and a new mandate may need to be filled out. Your utilities companies are likely to be able to transfer your direct debit over to your new address, but do think about whether the amount you paid at your old address will still cover consumption at your new one, especially if you’ve moved to a bigger property.
CAN I CANCEL AT ANY TIME?
Part of the Direct Debit Guarantee is that you, as the consumer, have the right to cancel a direct debit at any time. Usually this is done by informing your bank and then writing a letter to the company concerned to inform them you have cancelled the agreement. Cancellations can be done with immediate effect but you must make sure you are able to pay your bills some other way if you are to remain a customer.
If you no longer need to make that payment, for example, at the end of a loan agreement it is still wise to cancel the direct debit so that errors are unlikely to be made.
For further information and to see the direct debit guarantee in full, log on to www.directdebit.co.uk
And my title? Well, make sure your bank never accidentally thinks you have died. A colleague of mine recently took a phone call from a customer whose bank had cancelled all his direct debits and then phoned the companies concerned to inform them he had passed on. And he was left with the task of setting them all back up again as, in fact, he hadn’t died at all!
(The ratings below don't really apply to Direct Debits so have just filled in Average for all the options) 
by (23%):
17.05.2004 22:22
Excellent review, even I have learnt something about direct debits and I work in a bank and deal with them everyday. I can be confident now after reading your op that I am giving my customers the right information about direct debits. Just one thing I'm not sure if you mentioned. Direct debits are actually controlled by the company and not the banks. Therefore it is actually the companies that take the money from the bank accounts rather than the bank sending the money to the companies. (ifyou did mention this I apologise I must have just missed it!!!) SARAHxx
26.04.2004 15:54
Excellent detailed review - with respect to some of the comments below, this was indeed very readable and informative! kels x
12.04.2004 02:24
Highly extensive, informative and yet pleasing to read!!! XxLisaxX