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For many people, paying their gas and electricity bills still means paying them over the counter at their bank every quarter by cheque.
Although a great percentage of these people are aware there are other ways to pay their energy bills, many are reluctant to even investigate the various payment options open to them.
They either believe that homeowners on direct debit that pay too much and end up giving their energy company an interest-free loan or else don’t pay enough and end up in debt to their company, which then forces them onto a prepay meter.
Cheaper by the debit
However, there is no getting away from it: paying by monthly direct debit will mean you receive a discount from your supplier – and a slightly bigger discount if you take both gas and electricity from the same supplier.
Suppliers generally offer between 6% and 8% discount from the bill on some of their tariffs and, as the average household energy bill is currently hovering around the £1,350 mark, an 8% discount is a saving of almost £110 a year. Certainly not to be sniffed at.
But there’s also no point hiding the unpleasant truth that many people find themselves – through no fault of their own – in debt to their energy supplier, simply because their direct debit amount was set too low.
Nevertheless, energy companies are aware of this and are raising the level of direct debit payments, but this brings with it the risk of overpaying.
Striking the balance
The trick is to get the right balance from the start, and this means being both honest about the amount of energy you consume and realistic enough to take into account that energy prices go up far more than they come down. For example, since 2004, average UK household income has increased by 20%, but the average energy bill has risen by 140%, according to uSwitch.com.
The amount of the monthly direct debit is set by the energy company. This is based on your previous energy consumption or on the average consumption rates for a property your size. The most accurate way of ensuring the direct debit amount reflects your household consumption is by using previous energy bills.
Calculating your energy consumption based on your property’s size is, at best, a guesstimate, as, for example, a three-bedroom, two-reception semi-detached can vary considerably in size and also in energy efficiency. In addition, some energy companies might not take into account where in the UK your property is located, so even though you actually live in the balmy south-west of England, your direct debit payment might factor in the bills of someone living on Orkney and be higher as a result.
A few factors to bear in mind
It should go without saying that households use less energy in the summer than in the winter (especially gas), but, when looking at their energy bill, this truth slips many peoples’ minds – they see credit building up over the summer months and rush to reduce their monthly payment. Remember that any credit you accrue in the summer is used towards the costs of higher consumption in the winter.
Also, your direct debit payment isn’t set in stone and can be reviewed by the energy company twice a year. The realistic attitude to take is that it will increase, usually because wholesale energy prices have increased, but also if your supplier deems your current payment to be on the low side for the amount you’re consuming. The good news is that your supplier can only change your direct debit amount at these twice-yearly reviews.
Another review is the annual review, which is something all the major energy suppliers are starting to offer their customers. It usually consists of a review of your tariff to see if you’re on the cheapest for your circumstances, an energy efficiency review and a payment review. This final aspect of the review can be a double-edged sword, as your supplier will look to see whether your account is in debit or credit and this will influence your direct debits for the coming year.
For example, with EDF Energy, accounts in credit by £150 or more will get this refunded. However, those owing £150 or more will have this debited from their bank account. Any amount lower than £150 will be carried over and the coming year’s monthly payments adjusted accordingly.
Switching to monthly direct debit on your current tariff will definitely save you money. Switching both tariff and supplier could save you even more. Compare energy prices with mymoneycomparison.com to see if you can get a good deal and make it better by getting a further discount for paying via monthly direct debit.