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
News
people

Harry Potter actor suffered 'severe flu-like symptoms' on a flight from London to Orlando

Arts and Entertainment
Legendary Star Wars filmmaker George Lucas
film
News
news
Arts and Entertainment
tv

First full-length look is finally here

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
Frank Turner performing at 93 Feet East
musicReview: 93 Feet East, London
News
Toronto tops the charts across a range of indexes
news

World cities ranked in terms of safety, food security and 'liveability'

Extras
indybest
Voices
A mother and her child
voices
Voices
The veterans Mark Hayward, Hugh Thompson and Sean Staines (back) with Grayson Perry (front left) and Evgeny Lebedev
charity appealMaverick artist Grayson Perry backs our campaign
Finacial products from our partners
Property search
The new rules will come into effect on 6 April

Pension firms must ask consumers more questions, says City Watchdog

Companies will be required to ask about health and lifestyle choices or marital status, to protect consumers who do not take up the government’s offer of the Pension Wise guidance guarantee service

Simon Read: Frozen in time - the expat British pensioners who deserve a better deal

I had dinner with the pensions minister Steve Webb this week. There was a wide-ranging discussion about the new pensions freedoms starting in April, and changes to the state pension. Crucially, I also got to ask Mr Webb whether he had any plans to have another look at the injustice that is frozen pensions.

Number of serially under-performing investment funds has increased by a fifth, survey reveals

The new Spot the Dog survey shows that even famous fund managers, holding billions of pounds of our money, can make mistakes

Mark Dampier: We always bring down Britain. But there's plenty in the tank

While the health of the economy is not insignificant, Mark Dampier finds it incredibly unpredictable in terms of its impact on the stock market

If you haven’t switched supplier or tariff in the last 12 months then you could almost certainly save money by doing so

There are easier ways to save hundreds on your energy bills

A new free app is aimed at the three-fifths of Brits who have never switched supplier

Worse hit are loyal customers with long-standing accounts – their loyalty is rewarded with lower interest rates than more recently-launched accounts

Savers are being let down by banks and building societies, says Financial Conduct Authority

Regulator’s investigation into the market found that around £160bn was held in easy access savings accounts that pay interest lower or equal to BoE base rate

What to do if you're facing repossession: However far you fall, you're not on your own

Helen Fisher had to become a 24-hour carer, and then she faced repossession. But going to the right places for help changed everything, writes Simon Read

Simon Read: Information is power. And it's in the wrong hands when people are cold-called by companies that know they're in debt

In debt? You're likely to be targeted by unscrupulous companies that hope to profit from your misfortune. They may try to pretend to be your friend by offering what they call "help" – but almost certainly that help will come with a cost and leave you worse off than you were before they got in touch.

Mark Dampier: So you've got pension freedom... will it end up as a cold shower?

In less than three months' time radical changes to pensions will take effect, providing investors with more freedom. Yet for those who prefer to make their own investment decisions, the choice of funds available is overwhelming. And an income drawdown account is also not particularly easy to manage.

The move marks the culmination of a long campaign by debt charities and insolvency firms and follows a call for evidence launched by the Minister last August

Bankruptcy rules to change, Business Minister announces

The minimum amount for which you can be forced into bankruptcy is being raised from £750 to £5,000

Three-quarters of parents say being unable to afford to heat their home adequately is hitting the health of their children

Family well-being and health hit by heating costs

A shock report reveals that fuel poverty is affecting desperate families – and their children

Many people have no understanding of pensions

Are you ready for pensions reforms?

Most people are too confused to know how to use their pensions for a secure income

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

    Ashdown Group: Product Manager - (Product Marketing, Financial Services)

    £30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Recruitment Genius: Technical Report Writer

    £25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

    Day In a Page

    Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

    Isis hostage crisis

    The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
    Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

    The runaway buccaneers and the ship full of gold

    Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Maverick artist Grayson Perry backs our campaign
    Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

    Assisted Dying Bill: 'I want control of my life'

    This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
    Move over, kale - cabbage is the new rising star

    Cabbage is king again

    Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
    11 best winter skin treats

    Give your moisturiser a helping hand: 11 best winter skin treats

    Get an extra boost of nourishment from one of these hard-working products
    Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

    Paul Scholes column

    The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
    Frank Warren column: No cigar, but pots of money: here come the Cubans

    Frank Warren's Ringside

    No cigar, but pots of money: here come the Cubans
    Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

    Isis stands strong as its numerous enemies fail to find a common plan to defeat it

    The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

    Virtual reality: Seeing is believing

    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
    Homeless Veterans appeal: MP says Coalition ‘not doing enough’

    Homeless Veterans appeal

    MP says Coalition ‘not doing enough’ to help
    Larry David, Steve Coogan and other comedians share stories of depression in new documentary

    Comedians share stories of depression

    The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
    Has The Archers lost the plot with it's spicy storylines?

    Has The Archers lost the plot?

    A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
    English Heritage adds 14 post-war office buildings to its protected lists

    14 office buildings added to protected lists

    Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Scientists unearthed the cranial fragments from Manot Cave in West Galilee