Is paying by direct debit a rip-off?

Does paying by direct debit really save you money? Countless utility companies want you to think so, claiming they save consumers cash and inconvenience.

But such arrangements allow companies to take money from your account every month, even if they're not owed the cash based on estimates. Who benefits from this arrangement, then, really?


£1.7bn better off

It certainly benefits the utility companies. Who wouldn't like the idea of several tonnes of money reliably dropping into their account every month without fail? If this is cash utility companies actually aren't owed they can still profitably invest it without your consent - until you claim it back, without a cent of interest.

Which? surveyed the arrangement a few years ago: electricity customers using direct debit were in credit by £74 at any one time while gas customers, Which? found, were typically ahead by more than £80. Multiply those cash numbers by around 20 million UK households and you have a massive amount of interest-free cash being lent to the utility operators by their customers.
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Apply these sums to a market where many customers are loath to change suppliers or shop around for a better deal because of the complexity around switching. No wonder the share prices of utility companies have been increasing of late. The Mail reckons utility companies are now hanging onto £1.7bn of consumer cash which they're not entitled to.

Interest-free loans

Yes, direct debts can reduce the hassle and worry out of monthly bill-paying. They're especially good for those on tight budgets, wanting to spread their payments. But clearly the arrangement is somewhat one-sided. You're even penalised by not paying by direct debt.

Some companies, like BT, will charge you extra for paying by cheque. It's called a 'process payment' charge and it costs more than £22 a year.

"BT has for many years maintained a price differential between those who pay by direct debit and those who do not," BT told AOL Money. "We believe it is fair and reasonable for there to be a price differential between customers paying by direct debit and those who don't. BT maintains a differential because it costs more to process non-direct debit payments."

Auto-refund?

Still, if you'd rather not continue giving the shareholders of private companies interest-free loans, then think about calling in your reading regularly instead of paying an estimated figure by direct debit. But remember to check with your energy companies - there may be a discount to pay by direct debit so explore all your options.

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Is paying by direct debit a rip-off?

Figures from charity Age UK show that 29% of those over 60 feel uncertain or negative about their current financial situation - with millions facing poverty and hardship.

Even though saving for retirement is not much fun, the message is therefore that having to rely on dwindling state benefits in retirement is even less so.

To avoid ending up in this situation, adviser Hargreaves Lansdown recommends saving a proportion of your salary equal to half your age at the time of starting a pension.

In other words, if you are 30 when you start a pension, you should put in 15% throughout your working life. If you start at 24, saving 12% of your salary a year should produce a similar return.

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