When direct debits are a bad idea

Watch out for hidden extra costs

Most of the time paying your bill by direct debit will save you money – but if you’re not careful they can also end up costing you hard earned cash.

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When direct debits aren’t the best idea

“Pay by direct debit to save” is a message you’ll see on most bills. And most of the time it’s true. From gas and electricity to magazine subscriptions and gallery memberships, you’ll find lots of places will give you a discount if you set up these regular payments.

But there some high profile instances where it’s actually better to pay the whole amount upfront.

Insurance is the worst offender. If you pay in installments you’re borrowing the money to pay for the cover, and then getting charged interest. So the vast majority of the time it’ll cost you more money.

And some direct debits can be estimated – meaning you pay more than you actually should. Energy bills are the main culprits here, and you could end up with more money on your account that you’ve actually spent.

I’ve broken down some of the times it’s bad to split your payments by direct debit, and when you can make a saving by using them. It won’t be the case for every company, so make sure you check the terms and conditions.

Which direct debits are bad?

You will usually be charged extra money on each of the following if you choose to pay by direct debit as you’re effectively taking out a loan for the product.

• Insurance policies – from home and contents to travel and car, making a monthly payment adds interest meaning you pay more.
• Car and vehicle tax – Pay for the full year for the cheapest price. There’s a 5% surcharge if you pay in monthly or 6-monthly instalments. However you can still set up a direct debit for a 12-month payment to make sure you don’t forget. All the different costs are here.
• Mobile phone handsets – it’s not always the case but you’ll usually pay less overall if you pay upfront for the handset rather than get it as part of a contract.
• White goods – rent to own services charge extortionate interest when you buy a TV or washing machine.

Alternative ways to spread the cost

If not a direct debit, what? Well paying for a full year in one go for car insurance or a new phone can be pretty expensive. Ideally you’ll have planned for these as most are expected costs and have the cash available in your savings The easiest way to do this is to calculate the annual costs for there services and split it by 12. This is how much you need to save into a separate pot each month to cover the costs.

But if you don’t have the savings to pay for them? If you can get a 0% purchase credit card it’s a good way to spread the payments without getting charged. You will need to make minimum payments each month, and make sure you have a plan to clear the borrowing before the 0% period ends. Fail to do both of these and the charges can be sky-high.

Buy Now, Pay Later is also an option, though you’ll find the interest free periods are often much shorter, perhaps just a couple of months.

Or you could borrow from a friend or family member – just make sure you do pay them back!

When direct debits are good

Of course, on the whole, direct debits are good and can save you money or help you budget. They’re also protected by the direct debit guarantee. This means if something goes wrong, perhaps you’re charged too much, you’ll get the money back.

These are the key services where you could be given an extra discount for paying in regular instalments.

• Gas and electricity bills – these charges will be estimated so give regular meter readings to make sure you don’t get caught out by paying too little or too much. You can contact your supplier and ask for a refund if you have a decent balance.
• Credit card repayments – you won’t forget to make your monthly payments this way! Try to clear the whole balance, or at least as much as you can afford, rather than the minimum required.
• Magazine and streaming subscriptions – Monthly payments give you the option to cancel at any time. Just don’t forget to do this or you’ll roll over for another month or year.
• Memberships – e.g. gym, galleries and clubs. Watch out for auto-renewal here too.
• Donations to charities – though if you can give via Payroll Giving at work you’ll be able to give before you get taxed.

Then there are a few where it doesn’t make much a difference – well you don’t make a saving. However, paying for the following by direct debit will help you spread the cost over 12 months.

• Council Tax – you can ask to pay this over 12 months rather than the default 10 months if you want consistency each month
• Water bills
• TV Licence

And if you choose to pay many of the bills above via direct debit from a selection of Santander current account, you’ll also earn cashback on those payments.

Remember a direct debit means the amount can vary each month, but a standing order is for a fixed amount. It’s important to make sure you have enough money in your account before committing to a direct debit to avoid penalties for going overdrawn.