Automatic bill payment can help you pay your bills on time with minimal effort, once you take the time to set up the payments with your financial institutions and service providers. That might sound appealing, but be careful — there are some pitfalls to watch out for.
Read on to learn more about the rewards — and risks — of using Direct Debits.
- What is a direct debit?
- Pros and cons of Direct Debits
- When are Direct Debits a good idea?
- Tips for setting up Direct Debits
What is a direct debit?
Direct Debits, once you set them up, allow you to transfer money from a current account of yours to a creditor, service provider or other organisation at a preset date, without having to initiate the payment yourself every time a bill is due.
You can set up Direct Debits as a “pull,” where you authorise an organisation to draw from your financial account for an agreed amount when a bill comes due.
Direct Debits are used to pay the kind of bills that vary from month to month. When you set up a direct debit, you are authorising a company to take however much you owe them. However, they have to tell you in advance how much they’ll take and when they’ll take it.
Pros and cons of Direct Debits
Pros
- You won’t have to remember due dates for specific bills: Once you set up your payments, your bills will be paid at the predetermined time.
- You can avoid late payment penalties: By taking yourself out of the equation after setting up a direct debit, you also remove the risk of forgotten (and missed) payments. That’s good protection against finding yourself cut off from the service you’re paying for, or incurring late fees or possible damage to your credit scores.
Cons
- You could overspend: If you forget about the bills you owe, your spending might push your account balance lower than the amount you need to cover your bill payments.
- You could get hit with fees: And if you don’t have enough money in your account to cover Direct Debits, you could get hit with fees from both your financial institution and the organization you are sending money to.
- You have to monitor your account balances: See above for what might happen if you don’t!
When are Direct Debits a good idea?
As you can see, paying bills automatically can be helpful, but only if you’re organised and committed to monitoring your finances.
As long as your monthly expenses are consistently less than your income — for most of us that means a job that pays us more than we spend — Direct Debits could work for you. But even if you’re confident about it, it’s best to start with one or two predictable bills that aren’t too large. Once you get used to that, you can try adding more bills until you find a system and level of automation that works for you.
Remember, Direct Debits are not a license to totally check out on your finances. It’s just supposed to help you guard against missed payments and cut down on your worry and time spent on your finances.
It’s also important to remember that even with Direct Debits set up and running smoothly, you should still check periodically for errors in your billing statements. Look for changes in prices and amounts billed, or unexpected one-time charges that can throw you off track.
What bills work well with Direct Debits?
It’s best to use Direct Debits for bills that come due relatively frequently, say weekly or monthly, and for a predictable amount. With bills like your mortgage, mobile phone or internet service, you know what to expect every billing cycle, and you can set up your payments accordingly.
Infrequent bills, like an annual subscription or your water usage statement, may not be the best candidates for direct debit payments, because you’re likely to forget about them. If one of those bills hits your account when your balance is low, you may end up overdrawing your bank account and getting hit with a fee.
In some cases, setting up a Direct Debit can even save you money, since a number of utility providers will give you a discount for paying by Direct Debit, seeing this as a more reliable form of payment.
Credit card bills can present challenges when it comes to direct debits, because you’ll need to cover at least the minimum amount due, but may or may not have enough money to pay off the full balance or make a bigger payment every month. One solution is to authorise a credit card to debit your bank account for the minimum amount due each billing cycle, and then make a manual payment for anything over the minimum you want to pay. This way, the Direct Debit protects you from being charged any late fees or penalties, but you can still pay more than your minimum as your budget allows – and pay down any outstanding balance at a pace that suits you.
Tips for setting up Direct Debits
Direct Debits are good for paying regular bills, including gas and electricity. To set up direct debit, contact the organisation collecting the payments. They will tell you what to do. Usually you fill in a form and send it to them or set it up online or over the phone.
Some companies will let you choose the date you’d like the payments to go out, so you can set it up to go out after payday and then relax, knowing you’ll have the funds to cover your outgoings.
Once a Direct Debit is established, the company can collect whatever amount you owe them. However, they have to tell you in advance how much they’ll take and when they will take it.
Setting up a direct debit is free. And if the company offers a discount for paying this way, you could save some money.
If you ever need to cancel a Direct Debit, you should first contact the payee directly and then your bank. If you only cancel the Direct Debit through your bank, this may not stop the payee from requesting it again on the next payment date. And the creditor may add late fees if you have only stopped the payment, but haven’t cancelled your arrangement with them first.
Also, if the bank or the organisation collecting the direct debit makes a mistake and takes a payment they’re not entitled to, you can get a refund from your bank. This is called the “Direct Debit Guarantee” – it’s good to know!
Bottom line
Direct Debits — once you take the time to set them up — can help you handle your bills with minimum effort and cut down the time you have to spend each month making sure you pay bills when due.
If you choose to use Direct Debits, start with just a few bills to get used to the system, monitor your available cash to be sure it will cover your preset bill payments, and check your bills regularly for changes or mistakes.