Direct debits can help keep bill payments on time and avoid late payment fees or interest being charged. Here’s a guide to managing your direct debits to make life easier, what you need to know about timing your direct debits, and how to save some dosh, too.
The timing of the direct debit can truly show the difference that a day or two makes. If the balance on a credit card holder’s account is often drawn down towards the end of the month, right before they get paid, then it is not wise to schedule a direct debit to occur prior to their end of the month pay cheque. If the card holder constantly employs the majority of their spending limit every month, a direct debit during the last week can be just enough to send them into overdraw. However, even if they do not come close to their credit limit, a direct debit can still put the user in excess of 30 to 50 percent of their debt utilisation. This is something that users will want to avoid unless absolutely necessary and it is also an occurrence that can be brought about quickly if the card holder has arranged for multiple direct debits to cover multiple financial obligations. Therefore, it is best for card users to set up their debits for a time of the month when they know their account balance will be replenished.
The consistency and reliability of a direct debit can undoubtedly be a very beneficial feature for credit card holders, but the effectiveness of a direct debit hinges on the ability of the card holder to keep their credit card balance from reaching its full spending limit. Credit card users should keep their balances under 50 percent of the total available credit just as a matter of good credit practice, but it can prove especially advantageous to do so if the account has direct debits placed on it. This is because the direct debit, unless cancelled by the card holder, will be charged through to the account irrespective of whether or not the account balance is nearly topped off. For example, if a credit card holder has arranged for a direct debit of approximately $100 for their monthly gas bill, but they only have $98 left to spend on their credit card, then they will very quickly go into overdraw. As a result, they will be hit with overdraw fees that could very well accumulate at a daily rate depending on the lender.
Depending on the credit card company and the type of credit card that the customer is using, the arrangement of a direct debit may incur a fee per each authorised deduction. While such a fee is usually not very high (generally no more than a few dollars) it can add up to quite a bit of money, depending on the number of direct debits that have been set up on the account. All of this additional money will need to be factored into the card user’s budget. From there, the user should add up all the fees to see how much they will cost in a given month and then weight it against the convenience of the direct debit service. Sometimes, having a series of direct debits on a credit card account may actually make not make the feature worth it due to the amount of fees paid each month. Not only that, but it can be these fees that push the credit card holder into overdraw, thus engendering even more fees and damage to their credit score.
Pauline is a personal finance expert at CreditCard.com.au, with 8 years in money, budgeting and property reporting under her belt. Pauline is passionate about seeing Aussies win by making their money – and their credit cards – work smarter, harder and bigger.
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