Think twice before writing out a credit card cheque

By Emma Lunn

Want to increase your debt load -- and stress level -- quickly? Try using a credit card cheque, thinly disguised as a quick, easy way to get cash, but at a much higher cost.

Credit card cheques are a paper form of your plastic. They are sometimes offered by banks as a convenience to customers in case they can't pay by card. But think twice before using them.

What are credit card cheques?
Credit card cheques look like normal blank cheques but are used to draw funds from your credit card, instead of from your bank account. In the past, credit card companies and banks often sent unsolicited cheques to their customers. However, in July 2009 the government announced a ban on lenders sending the cheques unless the customer specifically asked for them. credit-card-cheque

The risks of credit card cheques
Credit card cheques are seen as controversial for several key reasons.

  • They are an expensive way to borrow: Credit card cheques are treated as cash advances by issuers and incur the same fees. This means you could be charged a handling fee of as high as 2.5% of the sum you spend with the cheque. So if you wrote a cheque for £1,000, the fee will be £25.

    What's more, issuers often charge a higher interest rate for cash advances (and, thus, credit card cheques) than they do for regular purchases. That means you'll get hit with an extra-high interest rate for every month you leave the debt you incurred from credit card cheques unpaid.
  • They have no grace period: Credit card cheques don't come with the interest-free period normal purchases have. With normal credit card use, can enjoy a grace period of between 45 and 59 days before the charges start accruing interest. But this isn't the case if you write a credit card cheque; you'll be charged interest from day one.
  • They have fewer consumer protections: Credit card cheques do not offer the same level of protection under Section 75 of the Consume Credit Act.

Normally when you buy something costing between £100 and £30,000 using a credit card, you can make a claim against the issuer if goods fail to arrive, are damaged or faulty, or don't meet their description. If you buy something using a credit card cheque, however, you aren't covered in the same way.

Is it ever OK to use credit card cheques?
Despite the downsides, credit card cheques can provide you with flexibility in unexpected circumstances.

"Some people find that they're a useful option for certain situations where a credit card can not ordinarily be used -- for example to pay another person, retailer or service provider who doesn't have credit card accepting facilities, like an emergency plumber," says Neil Aitken, spokesman for the UK Cards Association

Yet Aitken is quick to point out that borrowers thinking of writing a credit card cheque should familiarise themselves with the charges that apply first. Credit card cheques will come with their own version of the "summary box" that is now included on all credit card statements. This is where you can educate yourself with the aforementioned fees and interest rates.

If, after weighing up the pros and cons, you think you need credit card cheques, you must request them directly from your card issuer. You will receive a maximum of three credit card cheques per request and can use them like normal cheques to draw on funds up to your existing credit limit.

However, customers should note that their banks may no longer even issue credit card cheques. RBS dropped them in Sept. 2006, and MBNA did so as well in March 2010.

No matter your issuer, you should take care of any unused credit card cheques in your possession to protect yourself from fraud. Destroy or shred them if if you have no plans to use them -- never just throw them away.

See related: Credit counsellors share consumers' biggest credit mistakes, 6 things you need to know about overdrafts


Published: 20 November 2012