Shun These Cheating Cheques!

Before you write a credit-card cheque, be sure to read the small print. Otherwise, you'll fall for these four nasty tricks.

According to a recent survey from uSwitch, just over half of all UK credit-card users (51%) have been sent credit-card cheques.

Over the past year, eighteen million cardholders have received credit-card cheques, with over 144 million being issued each year. Although 49 out of 50 credit-card cheques (98%) are sent unsolicited by card issuers, almost four million people used one or more in the past year, spending almost £3.4 billion in the process.

Now for the bad news: card firms make an estimated £443 million a year from these junk-mail horrors, thanks to handling fees of £67 million and interest of £376 million. These four tricks explain why you should shred these costly cheques as soon as they hit your doormat:

1. Handling fees

Credit-card companies charge an average handling fee of 2% of the value of each cheque. With the average value of a credit-card cheque being £850, this means that the typical fee is £17 per transaction. Hence, it's reckoned that banks are pocketing over £5.5 million a month thanks to these fees.

2. Interest charged at cash rates

Most credit-card firms treat credit-card cheques as cash withdrawals, not purchases, which means that you pay a far higher interest rate. Indeed, the interest rate on a typical cheque is a whopping 22% a year, which is considerably higher than the average rate on purchases of around 15.5% APR.

3. No interest-free period

Furthermore, as credit-card cheques are treated as cash transactions, you don't enjoy the usual interest-free period of 45 to 59 days which you normally receive for purchases. In other words, interest starts accruing as soon as a credit-card cheque is debited from your card account, making the banks yet more money.

4. No legal protection for defective goods

Under Section 75 of the Consumer Credit Act, you enjoy extra legal protection when buying goods or services worth between £100 and £30,000 using a credit card (but not a debit card). Alas, this protection does not extend to credit-card cheques, making them an even worse method of payment. However, four in five people (79%) interviewed were unaware of this loophole.

Should credit-card cheques be banned?

Personally, I hate credit-card cheques with a passion, partly because of the risk of fraud that comes from being sent unwanted cheques which are easy to steal. Recently, I closed my account with a leading credit-card company which sent me a book of cheques after I expressly warned it not to do so again!

Furthermore, I worry about how people use these cheques: the survey found that many people used them purely to make ends meet or to juggle their debts. I'm alarmed that two in nine people who wrote a credit-card cheque (22%) paid it into their bank account, plus a further 3% used them to pay their mortgage repayments. Aaargh, this is a horribly expensive way to borrow any amount of money!

Hence, I believe that the Department of Trade and Industry (DTI) should ban unsolicited credit-card cheques, as they are nothing but toxic time-bombs waiting to blow up in borrowers' faces. However, it refuses to do so, although it may decide to introduce large-print "wealth warnings" on every credit-card cheque mailshot.

Then again, given the failure of previous regulatory efforts to bring the banks to heel, I wouldn't rely on the DTI to improve consumer protection. Thus, I'd urge you to keep your wits about you and avoid credit-card cheques like the proverbial plague! If you need to borrow, why not avoid interest on your spending with a 0% on new purchases card?

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