Should you switch to direct debit?

Handing over control of your bank account may be unnerving. But it could save you time and money. By Frances Howell

Hesitation over setting up a direct debit is understandable. Unlike a standing order, which instructs your bank to make a fixed-sum payment on fixed dates, direct debit instructions allow for the sum paid to be varied by the company receiving the payment.

Yet direct debiting is on the increase. A total of 4.6 million new direct debit instructions were signed during this year's spring marketing offensive by the banks, utilities and local councils.

Sixty per cent of UK bill payers now pay an average of four different bills by direct debit. But the banking industry and the companies which offer direct debit billing ( known as originators) still see room for growth.

Their aim is to encourage not only new recruits, but also those who are currently dipping their toes in the water with a mere one or two direct debits, to take the plunge by paying eight to 10 different bills in the same way.

"People clinging to traditional ways of paying are being made to think again by the discounts available," says Michelle Weller of BACS, the UK's automated clearing house for direct debit instructions.

Direct debiting is tightly regulated by a code of practice. One of the consumer safeguards in operation is the indemnity agreement that originators must enter into with their own banks.

This obliges the bank to refund a wrongly billed customer if the originator cannot. Incorrect billing includes not only collecting the wrong amount, but also taking payment at the wrong time, too soon or too late.

Changes in the amount to be debited must be notified to the customer, at least 14 days in advance in the case of monthly direct debits, and direct debits can be cancelled at any time.

Obviously a move to direct debiting involves a loss of flexibility. You cannot stall paying your bills if you are short of funds. But it does save you filling in a payment slip, writing a cheque, finding an envelope, a stamp and finally a post-box (assuming you are not a telephone banking customer). It also saves the originator time and hassle and therefore money.

A wide range, and increasing numbers, of companies are now encouraging their customers to turn to direct debit by passing on some of their own cost savings in the form of discounts.

Although each discount offered is worth only a few pounds, generally transferring your bills to direct debit can save you a few pounds several times over.

Marks and Spencer, which is so customer cost-conscious that it still does not accept credit cards, offers lower annual percentage rates (APRs) for its Chargecard holders who pay by direct debit. If your account balance is less than pounds 1,000 and you are a direct debit payer, your APR will be 25.3 per cent as opposed to the higher 26.8 per cent. Balances over pounds 1,000 are charged at 20.6 per cent APR regardless.

Most of the regional electricity companies are now offering discounts in return for direct debit payments.

For example, London Electricity's discounts for direct debit payers are about 3 per cent off the average annual household bill of pounds 276.59. This adds up to a saving of pounds 9.05 which, although not huge in itself, could at least buy you a bottle of wine. So far it has encouraged nearly 25 per cent of its customers to pay this way.

Big savings are offered by the AA to its members who pay by direct debit. These range from pounds 5 off the annual pounds 41 fee for basic roadside assistance membership, to a pounds 20 discount off the top-of-the-range service, Option 400, which costs pounds 126 if paid by cash or cheque. These discounts have prompted 64.7 per cent of existing customers to pay by direct debit, and more than 70 per cent of new customers do so.

"We can make huge savings on banking costs, administration and renewal of memberships if they are paid by direct debit, so we pass those savings on to the members," says Natalie Proud of the AA.

The RAC offers its largest discount to new members who join its Reflex Europe service, and who pay by continuous credit card authority, which is similar to direct debit but is attached to credit cards rather than bank accounts.

Credit card payers save pounds 31 by paying only pounds 139 instead of the annual pounds 170 fee, whereas direct debit payers have to pay pounds 164, saving only pounds 6. The reason, says the RAC, is that direct debit failures are more frequent than credit card authority failures.

BT gives direct debit paying customers only a slight respite from high line rental charges with a princely pounds 1 off per quarter. If your quarterly bills are as low as pounds 40, this adds up to a 2.5 per cent cut. If your bill is closer to pounds 80 per quarter, this drops to a measly 1.25 per cent.

Despite the row over excessive pay to its chief executive, Cedric Brown, British Gas is hot on the trail of cost savings in payment processing. Its direct debit system, DirectPay, gives subscribing customers a 5 per cent reduction off their bill. The average annual household bill of pounds 311.52 is reduced to pounds 294.81 by direct debit, saving pounds 16.71. Since the launch of DirectPay in November 1994, the number of British Gas customers paying by direct debit has shot from three million to five million, in just over six months.

Cheaper bills are not the only reason. The British Gas scheme enables customers to spread their seesawing bills evenly throughout the year by calculating a regular monthly payment. "Customers prefer to avoid a big winter bill and pay a predictable monthly amount." says Gareth Wynn of British Gas.

For customers who are still averse to setting up an automatic stream of payments, but who pay promptly, British Gas has just introduced OptionPay. Customers paying within 10 days of the date of the bill will have pounds 2 knocked off the total of next quarter's bill unless they use a tiny amount of gas. However, DirectPay provides better value for money.

The sums saved by direct debit payments are not going to make you rich. However, the average household could save pounds 29.76 a year by simply paying telephone, gas and electricity bills by direct debit. (These figures are based on London Electricity's discount structure - check with your local power company for its arrangements.)

If you are really counting pennies, you'll also save on stamps and envelopes. But the real bonus is that you are in effect earning money by not having to worry about getting your bills paid.

When paying bills by direct debit

DO

Check your bank statements regularly to see that the right payment has been made. Non-payment can cause more difficulties than overpayment, particularly in the case of life assurance or insurance policies, which might lapse. If a mistake is made, whoever is at fault pays. If a policy has lapsed because of a bank error and a claim arises, the bank is liable to put the customer in the position he or she would have been in if the policy had been valid.

Follow telephone or fax instructions with a letter. Mistakes can and do happen. Payments continue to be made even though a customer has cancelled the debit instruction. To reduce the risk of payments continuing by mistake, cancel the instruction with the originator, so that it stops demanding payment, as well as with your bank.

Choose payment dates to suit you, for example a few days after your salary is credited to your account.

DON'T

Be put off claiming refunds in cases of incorrect payment even if you only notice the error six months later. However, errors are much easier to deal with if they are spotted immediately.

Start your day with The Independent, sign up for daily news emails
Sport
sportSo, how closely were you paying attention during 2014?
News
One father who couldn't get One Direction tickets for his daughters phoned in a fake bomb threat and served eight months in a federal prison
people... (and one very unlucky giraffe)
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
film
Arts and Entertainment
Brendan O'Carroll as Agnes Brown in the 2014 Mrs Brown's Boys Christmas special
tvCould Mrs Brown's Boys have taken lead for second year?
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
i100
Arts and Entertainment
Amy Adams and Christoph Waltz in Tim Burton's Big Eyes
film reviewThis is Tim Burton’s most intimate and subtle film for a decade
Arts and Entertainment
Jack O'Connell stars as Louis Zamperini in Angelina Jolie's Unbroken
film review... even if Jack O'Connell is excellent
Arts and Entertainment
Madonna is not in Twitter's good books after describing her album leak as 'artistic rape and terrorism'
music14 more 'Rebel Heart' tracks leaked including Pharrell Williams collaboration
Sport
Rooney celebrates with striker-partner Radamel Falcao after the pair combine to put United ahead
footballManchester United vs Newcastle match report
Finacial products from our partners
Property search

Where to look for returns in 2015: What will happen to stock markets?

The coming year is expected to provide opportunities for patient investors

Pension mortgages: 'The advice I was given was wrong and now I face losing my home'

It's a tale of wrongdoing by financial professionals and buck-passing by the regulators. Simon Read talks to a man who took out a pension mortgage

Simon Read: The point of having protection insurance? The right cover can help reduce your financial concerns at a time of extreme worry

In May Nicola Groves got a massive shock. The 45-year-old mother of two was told, bluntly, that she had breast cancer. "When I heard the words, 'You do have breast cancer and you are going to lose your breast', I felt as if time stood still," she says.

Mark Dampier: Maybe boom, maybe bust, but we'll probably just muddle along

It's that time again when the media looks back over the past year and forward to the next. I am reminded of an old film, The Day the Earth Caught Fire (1961). Near the end of the film a newspaper prints two headlines – which one it uses will depend on whether the world is saved or doomed.

Sainsbury’s sank 7 per cent to 234p; Tesco fell 3.2 per cent to 180.2p ; and Morrisons dropped 5 per cent to 159.9p

Money Insider: Supermarkets: the real challenger banks

The supermarket banks have always excelled at offering simple, no nonsense products, and savings accounts is another area in which they fare well

Pat and Richard Astbury at their home in Norton Canes, Staffordshire. They have benefitted from the Community Energy Project aimed at helping council tenants with their energy bills. They have had solar panels installed.

Locals in Staffordshire to save hundreds after new council-backed project to install solar panels

The sun is shining on people who struggle to heat their homes and it’s thanks to a sense of community

Gross household debt reached a historic high of around 160 per cent of combined incomes in 2007

Simon Read: Give people struggling with debt some breathing space

Struggling people need help, understanding and forbearance, not ill-thought-out pronouncements

A person walks through the City of London during the early morning rush hour in London

Simon Read: Caught up in the scandal about leaks at the regulator

You won’t find me bashing the banks for the sake of it, but sadly they’ve deserved all the criticism that’s been sent their way in recent years

There were around 750,000 victims of mobile phone theft in England and Wales last year, according to official figures

Money alert: Stolen mobile phones

Gillian Guy, chief executive of Citizens Advice: 'The injustice of shock bills for crime victims must end. The Government must stand up for consumers and cap bills from lost or stolen phones at £50'

Indian workers boil sugarcane juice to make jaggery, a traditional cane sugar, at a jaggery plant in Muradnagar, Uttar Pradesh's Ghaziabad district

Mark Dampier: A hot investment story is taking shape as India lets the light in

Stirring the pot: the Indian Government’s reforms of labour rules offer hope of a brighter future for businesses 

An AA patrol man helping a woman whose scooter had broken down.

Bargain hunter: Whisk up those leftovers instead of just throwing them in the bin

Knight of the road, look out: you’ve got a new rival 

How to raise money for charity this Christmas

There are so many ways you can raise money - and awareness - for charity. Rob Griffin explains how easy it is to donate and reap financial rewards

Simon Read: The Chancellor has stamped on an unfair tax. But will the delight of homebuyers mean misery for others?

Were you surprised by the sudden reform of the rules for stamp duty on property purchases? I certainly was. I've been calling for ages for a change in the tax to make it more fair – and, at a stroke, George Osborne did just that on Wednesday in his Autumn Statement.

Santander, whose ads have been fronted by the Olympic gold medallist Jessica Ennis-Hill, was among the banks where there were potential pitfalls with shared licences

Best savings rates are not all they might seem

Consumers can sometimes think they are shopping around for a rewarding account when in one important aspect, writes Samantha Downes, they are not
The sunlit uplands: switching out of a final salary pension may seem like madness, but there could be cases where it makes sense

Gold-plated pensions – the key to retirement freedom?

With some people are weighing up whether they will be better off cashing in their final salary pension next spring, Samantha Downes asks the experts

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: SVP Model Validation

    Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    Day In a Page

    A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

    Christmas without hope

    Gaza fears grow that conflict with Israel will soon reignite
    After 150 years, you can finally visit the grisliest museum in the country

    The 'Black Museum'

    After 150 years, you can finally visit Britain's grisliest museum
    No ho-ho-hos with Nick Frost's badass Santa

    No ho-ho-hos with Nick Frost's badass Santa

    Doctor Who Christmas Special TV review
    Chilly Christmas: Swimmers take festive dip for charity

    Chilly Christmas

    Swimmers dive into freezing British waters for charity
    Veterans' hostel 'overwhelmed by kindness' for festive dinner

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all