Over on The Consumerist, they recently posted an article about a restaurant owner who had $1.28 million debited from her bank account by the utility company. This was, of course, a mistake, and the utility company is fixing the bill and paying the overdraft charges on her bank account. The restaurant owner had received the bill, but hadn’t looked at it too closely, as her utility bill was always around $1200, and she somehow didn’t notice all of the extra zeros. Besides, since she paid with direct debit, she didn’t have to sit down and figure out exactly what she had to pay – that part was taken care of.
In the comments, a number of people said “This is why you shouldn’t use direct debit.” I disagree. I think that perhaps this is why you shouldn’t use direct debit on your debit card or bank account, but I think it’s more a lesson of looking at your bills. She received a bill from this company. She should have looked at it more closely.
I don’t use direct debit, as I never use a debit card, but I do have a few bills that I auto-pay on my credit card. Some, like my gym membership, are a fixed monthly fee. I have budgeted for them and know when they are charged to my account, so a few days after that date, I check my credit card statement online to be sure that everything is as it should be. Also, I didn’t have a choice in this matter. To get the “deal” on the membership, I have to use auto-pay. I’m okay with that.
Other bills, like my cable bill, fluctuate a bit. The cable bill only typically fluctuates a few cents, so it’s not a big deal. I do get a hard copy of this bill, however, and I look at it every month to see if the bill has gone up or down and why. I don’t want to find out that somehow, my neighbor’s been stealing my cable and buying all sorts of pay per view movies, after all!
A lot of personal finance bloggers advocate automating your finances as much as possible, and I agree – I automate my savings. But I physically pay my credit card bills and am sure to closely track everything that is related to auto-pay. And I never have anything linked directly to my bank account. It’s not too difficult to dispute a huge charge on my credit card, but even if I can challenge a huge debit to my bank account, I still have to have other funds in that account to cover what I need to buy until the dispute is resolved.
Megan is a 40-something government employee in the Washington, DC area. She got interested in Personal Finance when she got out of college and realized that her paycheck wasn’t going to go as far as she had hoped. Since starting this blog, she has managed to buy a house and make a solid start on her retirement goals, and hopes to help others do the same. Here is her story:
In 2007, I was a gainfully employed 20-something with no debt but not a lot of knowledge about personal finance. It was a co-worker’s comment about Roth IRAs that sent me to the internet, searching for information. It was then that I realized that I really didn’t know a whole lot about personal finance and that my current financial situation was due a lot to inherent frugal tendencies, generous family members, a fear of debt, and good luck. While that was working for me, clearly I needed a better plan.
While I had no debt, I was also pretty much living paycheck to paycheck and not worrying about going over budget (I say this as if I had a real budget) because I had an emergency fund set aside to cover any overages.
Except that’s not what an emergency fund is for.
So I did a lot of research, read a lot of blogs, and decided that I needed a plan. I needed to budget. I needed to know what I was spending my money on. I needed to prepare for the future.
I decided to create a blog not only to make myself accountable to others but also to share the knowledge that I gained along the way. I’ve learned so much from my fellow bloggers, and I hope that my readers can find something useful in what I have to share as well.
Fabulously Broke says
I personally don’t like automatic withdrawals precisely for that reason — that I could get into trouble with an overdraft fee, get pissed off, my money is locked etc..
It’s just the hassle of a potential problem/fight with the company I want to avoid, spending time on the phone to work it out. I’d rather get the bill, review it, then pay the amount online immediately and then file it away.
Healthy Amelia says
I have this weird issue with dealing with paper. I hate it. I love having as many things automated as possible and whenever I can get my statements sent electronically, I do it. I do hook everything up to my debit card and am meticulous at checking my account almost daily. It has not been a problem and has improved my organization/handle on my finances to a great degree.
I do worry about the hassle of correcting a major problem, though. The issue for me is that I just finished up my debt repayment plan (I used a nonprofit consolidation company). I need to rebuild my credit a bit before getting a new card. I think having one rewards type card that I used in this manner would be a good idea. I’d just pay the balance each month.
There are a few bills I pay by direct debit, mostly because I can save money by doing so. My car insurance is a few dollars a month less because I’m signed up for direct debit, as well as my husband’s health insurance and our renters insurance. Like you, I just watch the statements and keep a close eye on my checking account to make sure everything is correct.
I agree with you that direct debit isn’t a bad thing as long as you’re mindful. It can even save you a few dollars a month in fees, which may not seem like a lot, but adds up over the course of several months and several bills.