When Direct Debits are a bad idea

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.

“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 – hence new plans from Ofgem to force companies to auto-refund overpayments at the end of each year.

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.

When 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 essentially 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.

There are also products and services where you can get a discount for paying upfront for a full year rather than monthly – though these come with their own risks. You’ll be tied into a longer deal, usually 12-months, and often can’t get a refund if you want to cancel.

• Streaming – Both Disney+ and Amazon Prime offer a plan to pay for 12 months which is roughly 12 months for the price of 10. Though this is only good if you think you’ll use it for the full year.
• Landline – Some companies will offer a discount if you get what’s called a “landline saver”. You pay for the full year upfront.
• Travel and sport season tickets – not quite the same, but you will normally save cash by paying upfront for your train or stadium seat.

Alternative ways to spread the cost

Of course, paying for a full year in one go can often be pretty expensive. Ideally you’ll plan for these as most are expected costs. 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 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.

Another option would be to 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. 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. Until the auto-refund measures come into force (hopefully in 2022) 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

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.