It's the Money Guy

ITMG TOP MONEY TIP: The Truth about a Direct Debit

Direct Debit
Direct Debit

Direct Debits – the king of payment methods!

A Direct Debit is a fantastic way to make a payment, they are one of the safest way to pay a reoccurring bill, plus, you usually get a discount by settling your bill in this way, not to mention the fact that you don’t have to remember to do anything, it’s automatic (you do have to make sure you have the money in your bank account though!) Additionally – you also have an insurance policy against it! (Sort of…) Some people really don’t like direct debits, so I’m going to try and set the record straight and iron out any myths about Direct Debits.

The Truth about a Direct Debit

There was a local company, that I used to help out, who went under – but could have been saved – had their business banking advisor informed them about this little trick.

There are loads of different ways to pay someone, Standing orders, Faster payments, CHAPS, cash,  you can pay on social media platforms like Facebook messenger, PayM, Card payments (chip n Pin and contactless), through your mobile…the list goes on! One way is of course – Direct Debits.

I know a lot of people don’t like using direct debits, and a common reason behind this, at least is that ‘People can take out any money from my bank account at any point’ which – in theory – is right…however, it’s not legal – if someone takes money out of your account without any prior say so or consent – it’s called ‘nicking money’ and nicking people’s money is generally frowned upon!

What is a Direct Debit?

Starting from the beginning, direct debits and standing orders are the most similar method of making a payment, but also they are very different, the end result is the same – you have less money, however, a direct debit is when you have the money taken away and a standing order is when you give it away.

Direct debits are an electronic instruction to be allowed to remove money from your account to pay a business. They are considered a variable mandates (Unless stipulated) as they can change – think Gas bill or mobile phone bill…Standing orders don’t change – unless you change them, so these are ‘fixed mandates’.

Some direct debits are regular payments (like a council tax bill) and some are only activated on an ‘as and when basis’ (think paypal or when you purchase something from ebay).

Direct Debits are usually pretty flexible in how they are set up, most companies will allow you to fix them. There are differnt ways you can “fix” the amount that you are paying. You could fix the amount of money or fix the % of what you are paying.

The different ways are – the minimum amount (which is usually a percentage of what you owe), a fixed amount, or for the full amount owing.

So if you have a credit card for example, you could pay by direct debit in 3 different ways:

  1. The minimum amount – to make sure you don’t get any black marks against your name, this is usually set at around the 3% mark – which, if you owed £100, would be £3. This is often the most expensive route as it’s THE MINIMUM, it also usually only just covers the interest rate and pays off maybe a small amount off what is actually owing.
  2. The fixed amount – so, if you knew you could only afford £50 a month, you could set a direct debit for £50 – this would obviously take 2 months to pay back (if you owed £100) and may involve a little bit of interest.
  3. The Full Amount – the best one – pay in full, if you owe £100 on a credit Card – your credit card is paid off straight away – and usually involves no interest whatsoever.

In order for businesses to have the ability to set up direct debits on their customers accounts, it often involves DBS checks and parting with thousands of pounds. Assuming that a business has the money, then they could (In theory) take out whatever money they wanted, however – as I said before this is theft and they’d be quickly shut down. To stop this from happening, direct debits are covered by ‘The Direct debit guarantee’. Now – everyone who has ever signed a direct debit mandate, electronically or physically would have seen one as its attached usually below where you sign, it even says ‘To be retained by the customer’ but very few people ever actually check it or read it. The Direct Debit Guarantee is there to protect the business and the person. It Reads:

  • This Guarantee is offered by all banks and building societies that accept instructions to pay Direct Debits
  • If there are any changes to the amount, date or frequency of your Direct Debit ‘the company’ will notify you 10 working days in advance of your account being debited or as otherwise agreed.
  • If you request the company to collect a payment, confirmation of the amount and date will be given to you at the time of the request.
  • If an error is made in the payment of your Direct Debit, by the company or your bank or building society, you are entitled to a full and immediate refund of the amount paid from your bank or building society.
  • If you receive a refund you are not entitled to, you must pay it back when the company asks you to.
  • You can cancel a Direct Debit at any time by simply contacting your bank or building society. Written confirmation may be required. Please also notify us. 

In other words – if a payment is taken out of your account too early, for too much, too many times, or comes out and you have no idea who it actually is, then all you have to do is contact your bank. They will give you an immediate refund – not 4 days – not 10 days – straight away!

This is where that business I mentioned earlier went wrong. They had an electricity bill taken from their account for the value of £900 – it was actually the electricity company that was reading their meters so it was, by no means, the businesses fault. Had their business manager told them that they could get a full and immediate refund, then it would have bought them at least another week.

It turns out that the payment taken, caused a few of their bills to then bounce and they couldn’t afford to pay wages and the electrician. When the electrician learned that they weren’t going to get paid, they then called on their credit agreement (which they can do) to be paid in full, immediately- which of course meant that they would default even further. Long story short, they had to set up a CVA (Company Voluntary Agreement) to try and settle their debt and eventually they had to fold the business.

Had they had the money reimbursed, everyone would have still got paid and they would have probably set up a debt management program with the electricity company – assuming it was a genuine error on the electrical companies’ behalf.

Direct debits are one of the safest ways to pay someone. It’s recorded electronically and its guaranteed (You can get your money back incase of the above reasons.) Nothing else can do that.

This guarantee is for both personal accounts and business banking account customers too.

There are also other advantages to paying by Direct Debit – not only are you covered by the above – but some companies will give you a discount just for paying in this way! So you can save money too.

On your bank statement – if your direct debit bounces (Because you haven’t got enough money in your account) It will show the money leaving, then coming back into the account. With a standing order (Under the same circumstances) the money won’t leave in the first place. This does make things a bit confusing when trying to work out why you were charged – because it doesn’t show your account ever going overdrawn.

If money is recalled then it is worth noting that if it proven that you do indeed owe the money, then the company can try and take the money back out of your account, or they may have to arrange a debt management program or scheme with you.

If you have had any problems with your bank or a company about a payment that is disputed, then get in contact with me, if you have any questions that want answering – then email me at Adam@itsthemoneyguy.com I’d love to know about your experiences and help if you need it!

About the author

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Adam Phillips

After being in the banking industry for over 10 years, its time to help educate people and business owners to the best of my ability!
We live in a world where (For some reason) Money isn't taught in the education system at all.
I'm here to help support both the household and the small business owner by helping save them money. More often than not, the household and the business owner is not too dissimilar. It's so easy to go about your day and never take the time to work out if what you are doing is the most reliable, most efficient or most relevant for you. This is where I come in!

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