FOOL SCHOOL
The Pros And Cons Of Direct Debits

June 6, 2005

Direct Debits are a hugely popular way of paying bills these days. Around 60,000 organisations use them for collecting a variety of regular and occasional bills including utility payments, insurance, council tax, mortgages, loans and subscriptions and 75% of the population takes advantage of the system. It's so much easier than writing cheques all the time.

But, although they can be a convenient way of paying household bills, you do have to keep an eye on them.

They work by you giving the payee company permission to regularly access money from your account to pay the bill for the relevant service or product you've signed up for. Critics of DD would argue that it hands over control of our bank accounts to companies and to a certain extent they've got a point. However, they do come with a built-in guarantee that applies to all banks and building societies taking part in the scheme.

If payments are taken in error, you are entitled to an immediate refund from our bank or building society branches and if the amount or payment date is going to be changed, the company is obliged to inform you in advance of the new amount and/or date. You can also cancel a DD at any time by writing to your bank or building society.

They are also safer and more reliable than other forms of payment. We all know that cheques can be lost, stolen or damaged, and are often a hassle to replace. On the other hand, DDs rarely go wrong, when you consider the vast number of transactions that are processed by BACS, the automated clearing house responsible for them.

They can also help you to budget by allowing you to spread the cost of bills, avoid missing payments and save time. Best of all, the discounts that some companies give to DD payers save you money - around £169 a year, according to BACS - as discounts are given on energy, water, telephone, TV Licence and satellite bills.

Nevertheless, there are two things in particular you watch out for when you set up DDs.

First of all, remember that you have given the relevant company permission to access your bank account and to help themselves to, often, unspecified sums of money depending on how much you owe each month. As a result, and because you know the bill is always going to be automatically paid, then psychologically, you may get a bit lax about how much you're spending simply because you no longer have to physically write out a cheque to pay the phone bill, for example.

Secondly, while you may agree with, say, your electricity supplier to spread your bill over the whole year by paying a set amount each month, you may not always notice that they're building up a sizeable cash credit - on which they, not you, will earn interest.

Even worse, you may be paying less than you should thus running up a large debt by the end of the year. So, for utility companies in particular, make sure you give the companies proper readings on a regular basis and that the amount you're paying each month is in the region of what you should be paying for the year's supply.

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