Your essential banking guide

Cash machineAre cheques only valid for six months? When should you use a credit card rather than a debit card? You might be surprised at the answers.

We know that money matters can be complicated, so it helps to understand some of the basics. Here are the answers to some common questions around banking.%VIRTUAL-SkimlinksPromo%
What's the difference between Direct Debits and Standing Orders?
A Direct Debit is a variable amount that is paid on your behalf by the bank to any organisation to whom you've given authority to collect payments. So, for example, you give authorisation to your phone company once and then they can ask for £24.72 one month and £32.61 the next.

As long as they tell you how much the bill is, they can help themselves to the required amount. Direct Debits are backed by an immediate money back guarantee from the bank or building society if an error is made, whether by the bank or the organisation requesting payment.
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Standing Orders, on the other hand are always for a fixed amount which is usually paid on a regular basis to a third party. If you want to change the amount you have to authorise it every time. In this instance you are instructing your bank to hand money over to a third party at your own request rather than at the request of the third party.

How long are cheques valid for?
Banks will usually reject cheques that are more than six months old but, in fact, it's at their discretion. They can choose to cash it if they want to so don't assume that if you wrote a cheque to someone over six months ago that you're off the hook from paying it! Cheques actually remain legally valid for six years – yes, we did say six years – and the only way to cancel a cheque is to ask for a 'stop' to be placed on it. However, cheques backed by a cheque guarantee card cannot be stopped (although guarantee cards were abolished in June 2011).

How long should a cheque take to clear?
This has been simplified and now follows a process known as the 2-4-6 rule. On the second working day (2) after depositing the cheque, you should start receiving interest, on the fourth (4) you can withdraw the money and on the sixth (6) you can be sure the money is yours and the cheque hasn't bounced.

Are post-dated cheques valid?
As you might imagine, banks don't like post-dated cheques – it's too easy for mistakes to be made – and many will forbid them in their terms and conditions.

Are bankers' drafts as good as cash?
Bankers' drafts – and building society cheques for that matter – aren't handed out by banks unless there are funds in place to cover them so they're unlikely to be returned unpaid.

However, they still have to go through the clearing system so there's no guarantee that the funds will still be there at the end of the process. There's no guarantee against fraudulent use if they're lost or stolen and used by fraudsters.

Do debit cards have the same consumer protection as credit cards?
The short answer is no. With credit cards where transactions are for more than £100 and less than £30,000, Section 75 of the Consumer Credit Act covers you if the goods paid for are faulty or fail to arrive – for example where a company goes out of business. Credit card companies are just as liable for the cost of getting your money back as the retailer is. Unfortunately, Section 75 doesn't apply to debit cards so when making big ticket purchases, especially over the internet, always try to use a credit card for the added protection.

What do AER and EAR mean?
When you're looking at interest rates, you need to be able to compare them on an annual basis, even if interest is paid or charged monthly, which is where AER and EAR come in. AER stands for Annual Equivalent Rate and is the amount of interest you will earn over a year, taking into account how frequently the interest is paid, any compounding (the effect of interest on interest) and fees for withdrawals. EAR stands for Equivalent Annual Rate and is the interest rate you'll be charged on an overdraft over a year, again with interest frequency, any fees and compounding included.

What's a packaged account?
Packaged accounts are bank accounts that charge a monthly or annual fee and, in return, offer a range of products and services for free, such as travel insurance, emergency cover and access to preferential rates on other products, such as mortgages and insurance. We're not fans of them and there's a potential mis-selling scandal brewing, as many people have been sold packaged accounts despite being ineligible for some or all of the benefits. Think very carefully before you sign up to one, as if you don't use or can't use all of the benefits they're a waste of money.

This is a classic lovemoney article

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