Sunday, May 07, 2006

Save by direct debit

Wouldn’t it be nice to never worry about being late with a bill payment and save money too? It might sound too good to be true but it isn’t.

The Holy Grail of home finance has to be finding a way to have more money by doing less work.
It's a little mystifying, then, that so many of us ignore the opportunity to do just that, especially given that we all have the means.

The secret is as simple as paying regular bills using direct debit rather than writing out a cheque. It's hardly exciting stuff, but when you think it could save you enough for a trip to Paris or a shopping spree it becomes a bit more interesting.

According to BACS, the company that oversees direct debit transactions in the UK, the average person will save £130 a year if they switch all their major bills to direct debit. Depending on who supplies your gas, electricity etc. you could save as much as £170.

Direct what?

Direct debit is the industry name for a regular bill payment made direct from your bank account. If you have a current account then you can organise direct debits - and that means money in your back pocket.
Electricity, gas, phone and insurance companies all offer discounts to customer who pay by direct debit. The companies aren’t just being nice, it's worth money to them to have customers pay by direct debit.

People who pay this way are more likely to pay on time, don’t send in cheques that have to be processed by hand and their money goes into the company’s account immediately. This results in savings that the companies pass back to customers to encourage them to use direct debit.

Nah, never heard of it
Direct debit has been around for more than ten years. Some 45% of all utility bills in the UK are now paid by direct debit, while almost 80% of satellite TV bills are paid this way.

Signing up is simple. Most regular bills include a direct debit instruction slip asking for your name and bank details. Fill in the form, send it back to the company concerned and you're on your way.

If a company doesn’t offer you a direct debit form with your bill phone them and ask for one. In many cases you can set up the direct debit over the phone or on the company's website.

Sounds risky

There is a danger, albeit a small one, in opting to pay bills by direct debit.
Quite simply, because you no longer physically write out cheques you can end up paying less attention to how much money is leaving your account, making it easier to lose track of your finances.

If you pay bills by direct debit you should make sure you read your bank statements carefully. If you aren’t doing this anyway then you should - you'd be surprised by how many mistakes banks make, and how rarely they end up in your favour.

You can ask your bank for a list of your direct debit transactions at any time and all the payments will appear on your bank statements.

If you find an overpayment or a payment made in error then you are protected by something called the Direct Debit Scheme. This guarantees an immediate refund from your bank or building society.

Also, as part of this guarantee, if a company receiving money from you wants to change the value or date of your direct debit they have to tell you at least ten days in advance.

Where can I save?

The biggest savings are from the utility companies. According to BACS, the average saving made by people paying their electricity and gas bills by direct debit is 7.5%, some £38 a year on an average gas bill of £505.
Telephone companies offer an average discount of 5.7%, which works out at about £20 a year on an average phone bill of £353.

There are some big savings to be made in less obvious areas, too. For example, paying for your roadside assistance by direct debit will save you 16.9%, taking £12 off on your annual cover cost of £70.

Where else?

Health insurers - savings average 5%.
Satellite TV - you should be able to save about 8%.
Store cards - many of these have lower interest rates for customers with direct debit repayment schemes.

What’s the catch?
Well there isn’t really a catch, but paying by direct debit is certainly not always the best option.
There are times when direct debit will cost you money. For example most car and household insurance will cost more, as much as 10% more, if you pay by monthly direct debit. You can save money in this instance by paying the total bill in one lump sum at the start of the policy.

But the big downside of paying bills by direct debit, particularly utility bills, is that you can find yourself overpaying. You don’t lose the money, you will either get a refund or a credit on next year’s bill, but it can still be annoying.

What do I do now?

You can ring all your utility companies and ask to be switched over – that way you will start to get the benefits immediately.

An easier way is just to wait for bills to come in and then fill out the direct debit forms that come with them. Because companies are keen for you to switch to direct debit they will be sure to tell you if there is a discount available and will provide a postage paid envelope for your form. It won’t cost you a thing.

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