Direct Debit Charges and How to Avoid Them

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By Crispin Bateman
Updated on Thursday 5 December 2019

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What is a direct debit?

Direct debits have been around for more than fifty years, providing a convenient way to automatically pay bills and other services without resorting to handing over cash or writing a cheque (remember those?!). Like many services and technologies, if used correctly, direct debits provide an efficient and useful service. However, if poorly managed, direct debits can do more harm than good.

What is the difference between direct debits and standing orders?

A standing order is an instruction from you to your bank to transfer money to another bank account at a regular time. An example would be a rent payment, where you set up a standard order to tell your bank to move the rent amount to your landlord’s account on the first of every month.

It differs from a direct debit in a number of ways:

1. A standing order is always regular – a direct debit can be irregular.

2. A standing order is always for the same amount – with a direct debit, it can change.

3. A standing order is made by you and is a ‘push’ of money from your account to another – a direct debit is set up by the company you are paying (the payee) and is a ‘pull’ of money to their account from yours.

4. You have complete control of a standing order and can change it as you like – a direct debit is controlled by the payee (although you can cancel it when you wish).

5. You can pay anyone with a standing order – companies that apply for a direct debit must be registered and follow the standard direct debit rules.

Managing your direct debits – avoiding direct debit traps

Direct debits are very useful for companies collecting a regular amount from their customers, especially if that amount may change (based on service usage, for example). Once a direct debit is set up by you, you have authorised that company to make a direct debit request as they see fit, providing (as per the direct debit rules) they give you ten working days’ notice.

One of the standard direct debits across the UK is one for your mobile phone contract. Once a month, the amount is collected (on an agreed date between you and the phone company), and though there will be a standard amount, changes such as you going over your call allowance, or using more data than the amount included in your plan will be added – utilising the flexibility of a direct debit.

Of course, the phone company will have followed the rules and provided you with a full breakdown of your impending bill before taking the money from your bank – but did you bother to read it?

Properly managing your direct debits is important. Here are a few tips to avoid costly traps:

1 – Timing

When do the direct debits leave your account? Did you do the sensible thing and make sure it’s when you know money will be there (the day after you get paid, for example), or did you simply say ‘yeah, sure’ to the advisor when they suggested a day?

Poor timing can lead to financial disaster, especially if you are carefully budgeting. Get those direct debits under control by calling the direct debit companies and requesting a change of date to one that is more suited to your regular budget. Though some companies only have a few scheduled dates where they are set up to take payments, they will do what they can to help your banking as much as possible and most are happy to rearrange it to any date you need.

Also remember that occasions such as bank holidays or even just a normal Sunday falling on the 1st of a month can throw a kink into the smooth running of your direct debits. Your online banking is of great help here, allowing you to adjust to any small alterations of the schedule.

2 – Read the junk mail – it might not be junk

If you get a letter or email advising you of payment changes, it’s worth reading! Under the direct debit mandate, a direct debit amount can change – but not without letting you know. If a company applies a direct debit increase without notification, then they are breaking the rules. Contact them immediately and if they fail to sort the situation, get on to your bank right away for them to help resolve the situation.

3 – Make sure the money is in there

Once you know what time your direct debits go out, you can plan properly. Check your account at the beginning of the day and if you don’t have enough money there, you have until 2pm that day to resolve the situation. If a direct debit is returned they will try again and this is usually done around 2pm – giving you a chance to fix a mistake with your finances.

If a failure occurs then, you will likely incur a charge from your bank and the company may try again the following day, or a few days later.

4 – Cancel unused direct debits

Because there is no rule stating a direct debit must be regular, a company with a valid direct debit mandate can take money from you often without you realising they still had the ability. It’s worth going through your list of direct debits with online banking and properly cancelling any of them that are done.

It can happen that a service is paid for once a year, or that some months pass without a payment being needed only for it to kickstart again and be a surprise. For example, many council tax payments only occur for ten months of the year – meaning there are two months where nothing goes out. If you have become used to the outgoings from your account in this clear patch, then when the direct debit starts again, you could be in for a shock. Similarly, annual insurance payments can automatically come out at a very inconvenient time.

Keep an eye on the direct debits you have authorised and if you don’t want to be surprised by something – cancel it. It won’t stop the service in question, and you will simply have to find an alternative way to pay it.

5 – Have a level of authorised overdraft to cover a mistake – and don’t spend it!

If a direct debit tries to go out and fails, you are likely going to end up paying bank charges. By having an authorised overdraft as a buffer, you can use it as a little extra time to resolve any mistakes you may have made without suffering expensive charges. Most current accounts will have a free overdraft facility that’s a much better alternative than a direct debit charge!

Remember not to treat the overdraft as free money – it’s not! Don’t spend it but have it there as a safety net.

6 – Don’t be seduced by reduced payments

Some companies offer a reduction on your payment if you pay by direct debit – for example, mobile phone companies offering £5 a month off the bill when paid by DD (an alternative way of looking at this is a £5 charge for people not willing to pay via direct debit!). While this is a great cost saver for anyone - as £60 a year is not something to be sniffed at – it is important that it doesn’t convince you to set up a direct debit you otherwise cannot manage easily. Don’t be swayed into passing over your bank details if you are in any doubt regarding your ability to have the money in the bank. Sometimes it is far better to pay a little more irregularly (but in your control) than having to meet a deadline that’s difficult and could incur a bank charge.

Taking control – how to stop direct debit payments

Remember, no one can take money from your bank account without your authorisation. You may not remember doing it, but you’ve authorised all the direct debits tied to your account, from gym memberships to charity donations.

If your direct debits are causing you a problem, take the proactive approach and cancel them with your bank. For many people this is as simple as loading the mobile app and navigating to the right section – but failing that, you can always pop into the bank.

When you cancel a direct debit with your bank, no one tells the company who the agreement was with – so you need to do that! Give them a call and if you want to leave the service, let them know. You may have a cancellation fee to pay or other agreement in place, but it’s better to do this than go on with a regular direct debit for something you no longer want.

If you do want to keep up with the service but no longer pay by direct debit, this should be fine. Just let them know.

Try to avoid simply cancelling a direct debit and not talking to the company involved. In some cases (such as a charity donation) this may result in no further action, but in others it could result in a huge bill growing (potentially with interest or other fees) that you later must deal with. Never stick your head in the sand with your personal finances! [fb blurb]

It can take a couple of days to cancel a direct debit, so don’t leave it until the last minute or you could find yourself with an unwanted payment going out anyway.

Understanding direct debit charges – can banks charge for returned direct debits?

A returned direct debit is one where the payment didn’t go through because of lack of funds, and this is where you run the risk of potentially explosive charges.

In all honesty, the chances are that people who are finding it difficult to cover their direct debits are most likely unable to afford any additional charges too. It’s a situation that can easily spiral out of control for anyone in that unfortunate situation and is a good reason why direct debit management is extra important for anyone who is trying to budget carefully.

So, what types of charges do you get with a direct debit and how do they affect you?

The returned or unpaid direct debit charge

The most obvious charge is the returned direct debit charge that occurs when you fail to have the amount in the bank to cover the request. As mentioned above, there’s a window for you to sort out a potentially bounced direct debit (usually 2pm on the same day), and if you have electronic banking alerts sent to your phone, this can be very useful. However, there’s always the chance that you simply cannot make it in time.

This charge is typically between £5 and £25 per time – the exact amount depends on your bank. Remember, this is a charge per direct debit, so if you have five that are all scheduled to go out on the same day and no money in your account, you could be looking at over £100 in fees! Again – this is bank dependant, with many having a daily cap on charges.

The returned direct debit charge is a major reason for properly managing your direct debits.

Unauthorised overdraft fees

Paying your direct debit could force you into an unexpected and unauthorised overdraft. Again, this situation depends on your bank, but may be an alternative to simply returning the direct debit. In this case, you will not be charged for the returned direct debit but will instead incur a fee for unauthorised overdraft – plus you will start being charged interest that will increase until you resolve the issue and get back inside your allowed limit.

Authorised overdraft fees and interest

You may find that your direct debits are paid happily, sending you into a previously arranged overdraft. This will not cause you any significant fees but will trigger any arranged fees and interest for using an otherwise-unused overdraft.

Unauthorised overdraft fees from charges

The absolute worst situation is one where the charges from your returned direct debits (typically applied some weeks later) cause you to unexpectedly go over your overdraft limit, causing a secondary set of charges and interest.

This can have another cascade effect of wiping out the available funds designed to pay the following month’s direct debits and spiralling quickly out of control!

If you find yourself in this spiral situation, contact your bank immediately. They may be able to reduce the fees, arrange an overdraft for you to help or find an alternative solution. Remember – communication is always crucial when it comes to money management.

The positive side of direct debits

It’s not all doom and gloom! The reality is that the direct debit system has been a positive experience for many people who’ve been banking over the past half a century and does follow through on its promises of convenience and ease-of-use.

If properly managed, your direct debits free up a significant portion of your month – imagine going back to the days of writing regularly to each organisation in turn to send them a cheque for this month’s bill! No thanks.

Like any service, direct debits remain your choice. Don’t fall into the trap of feeling forced to accept this regular enforcement of a bill if you are not comfortable with it. Unless the company is particularly short-sighted, there will be another way for you to make your payment. If you are unhappy about the idea of another direct debit, say so and look for alternatives.

For more help with your personal finance and budgeting, take a look at our range of articles on the subject – here at Compare UK Quotes we work on providing advice and links to the best deals on the internet today.

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