If saving money on your energy bill sounds appealing, now might be a good time to look into changing the way you pay before the new price cap kicks in on July 1.
Ofgem's new energy price cap was set today, May 25, at an average of £2,074 a year for direct debit customers and £2,077 for prepayment customers - but those who wait for their bills to come in before they pay will have to find £2,211 - an extra £137 a year or more than £10 more each month after June 30.
Prepayment rates will drop in July by a larger amount than direct debit rates as for the first time, the prepayment price cap will be at about the same level as the direct debit cap. Up to now, those on pay-as-you-go (PAYG) meters often ended up paying more a year for their energy bills than those paying by direct debit. However, in the Spring Budget, Chancellor Jeremy Hunt said that from July 1, the prepayment meter price will be the same as those who pay via direct debit.
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Remember, the price cap sets a cap on the tariff, not your bill and the annual prices are for what Ofgem regards as typical usage of 2,900kWh of electricity and 12,000kWh of gas a year. What you pay depends on how much you use, so if you use more than the average household, you could end up paying hundreds of pounds more per year than a family who pay by direct debit.
And families struggling to understand high monthly direct debits have been warned not to heed advice given on social media to cancel direct debits and pay on receipt of bill as experts warn that could plunge people into a winter of misery.
Monthly direct debits work by smoothing out the variations in your bills over the whole year. Your energy supplier will look at the amount of energy you are likely to use over the whole year and estimate the cost based on the current tariff and any increases expected. This amount will be divided by 12 and you will pay the same amount every month.
The suggestions to pay on receipt of bills started to gain traction on Facebook and Twitter discussion pages devoted to budgeting largely due to pressure group Don’t Pay UK's campaign, when supporters were encouraged to cancel their energy direct debit to protest at high charges.
There is a logic to only paying for the energy you actually use rather than the energy you might use, but paying by direct debit is the cheapest and most affordable thing to do in the long term. Money Saving Expert Martin Lewis has warned people against looking at a short-term cash flow gain against the longer-term cost increases of paying your bills as they come in.
Your energy bill can vary a lot between summer usage, when you are unlikely to have the heating on and won't use as many lights, and winter usage. Paying by direct debit means you pay the same amount every month, regardless of the amount used, as long as your total usage stays within the original estimate prepared by your energy company.
The plan is you pay more during the warmer months to build up credit for your heavier use in the winter months. If your estimate has been correct, families paying by direct debit should be starting to build up a credit now ready for winter. If you pay on receipt of bill, you will most likely pay less during the summer, but your bills will be larger in the winter.
It’s a common myth that energy companies guess how much you’ll use, but they only estimate if they haven’t received a meter reading from you so it's critical to send up-to-date meter reading regularly to make sure your estimate is on track. If you have smart meter, readings should be sent automatically.
The most common type of direct debit is 'fixed' monthly direct debit, but there is another option known as 'variable' monthly direct debit, available from some energy suppliers. The rates on both types of direct debit are the same, so you will benefit from savings by paying either way instead of when you receive your bill.
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If you prefer to only pay for what you use and and prepared for seasonal variance, you might prefer to pay by variable direct debit if your supplier allows it. To do this you must either a) have a working smart meter or b) give meter readings every month. Once your supplier has the readings from your meter, you will get a bill a few weeks before your payment is due to go out, letting you know how much your provider will take that month.
If you are interested in switching to paying by direct debit, contact your energy supplier and they can make the switch for you. Your payments will be protected by the direct debit guarantee, which is there to protect you if things go wrong.
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