Money Management: Direct Debits Explained
Choosing a Payment Method
Managing your finances can be tricky - everyone wants to look after their money, but many do not know how best to go about it. The issue of whether money management should be taught in schools has always been a hot topic and in recent months things seem to be developing. A draft curriculum was announced in February that involves plans to make ‘financial capability’ part of the secondary school curriculum in England, through citizenship lessons, by 2014. The planned changes will help students to understand financial topics like budgeting, wages and taxes. Also included in the new curriculum is an understanding of financial products and services. An important financial service that can help you to organise your finances and to make monthly payments is a direct debit. A direct debit can help you with the responsibility of paying bills every month and can also help you to organise your own funds and savings.
What is a direct debit? In basic terms this is where you give your bank certain instructions. These instructions are your authorisation to the bank to let a particular company or organisation withdraw specific amounts of money from your bank account. Usually a direct debit will be used to pay for an ongoing service that a company is providing. You will be informed in advance the exact amount that will be withdrawn and the date that the money will be deducted. Once you have agreed to these terms the money will be automatically withdrawn from your account. It is a similar concept to a ‘standing order’ however there is one key difference between the two services. With a standing order only you can change the amount of money and the date that it leaves your account. With a direct debit, on the other hand, the company or individual that you are paying can change these terms - but they must notify you of any changes a certain number of days (which varies between banking institution) before the money is deducted.
There are a number of advantages in utilising a direct debit service. The biggest benefit associated with direct debits is in situations where you have to make recurring payments. Direct debits can be set up on a recurring basis - payments can be withdrawn automatically on an annual, monthly, weekly or even daily basis. You can even choose a specific day for the money to leave your account. Using a direct debit can take the stress out of remembering when each payment must be made and the amount. Instead of having to keep track of every payment yourself, the money can be debited directly to the company, organisation or individual that you need to pay on a regular basis.
Direct debits can also be time saving, especially now that internet banking is prevalent and widely used. Previously, in order to make a payment it could involve going to the bank, filling out cheques and posting documents and payments to the correct people - it was a fairly inefficient process.. With a direct debit, once it is set up it will automatically be deducted. You don’t have to worry about organising the payment yourself. You don’t need to worry about accidentally being overdue or late on a payment or your payment getting lost in the post. Everything is taken care of for you, it is a much easier and more efficient payment system. Your direct debits can also be easily managed through your internet banking system.
Some organisations offer discounts if you choose to pay with a direct debit instead of another different type of payment. Many companies prefer direct debits because they are more efficient - the payment for their services will go directly to them. Using a direct debit can also allow any financial administration on the side of the company being paid to be carried out quickly. A direct debit will also give the company an exact date where they can expect the money to be paid - letting them plan their finances more exactly. Because of these advantages many organisations will offer discounts if you pay by direct debit in order to encourage more people to choose this payment option. Examples of organisations that may offer discounts include water and utility companies, local authorities and the TV licensing organisation.
There is also a certain degree of security that comes with using a direct debit over a different payment type. A direct debit will usually come with a guarantee that will provide protection in the unlikely event that something goes wrong. If money is taken out of your account in error when it should not have been then your bank is likely to have an immediate money back guarantee. Direct debits from different banks will generally have guarantees that cover the same things. It is the direct debit guarantee that makes sure that you are notified if there is a change in amount or date on your direct debit. A direct debit guarantee also provides you with the right to cancel your direct debit at any time. Because direct debits provide companies and organisations with an almost direct line to your bank account, they are closely monitored by the banks. Any company that uses or can set up a direct debit scheme will have to pass a bank’s vetting scheme before they are able to do so.
There are many advantages to using a direct debit and you can quickly and easily sign up to use a direct debit over the phone, online, by post or in person at the bank. Using a direct debit can make organising your bills and payments much less stressful and give you less to deal with each month. The added security and the monitoring of the scheme by the banks can also be beneficial. The method is less time consuming and can even have a discount. Many organisations prefer this payment method and it can be used for most types of payments including household bills or annual car insurance payments.