When money is tight, credit-card cheques can seem like a lifeline. However, you should watch out for these five traps.
Last week, I received a promotional mailing from the issuer of my latest 0% credit card. Attached to it were three credit-card cheques, together with the following marketing messages:
"Increase your purchasing power...Access your credit when you can't use your card...The convenience of cheques, plus the power of plastic"
If you were struggling and money was tight, then these messages might be very tempting. However, when you dig deeper, you discover that almost all credit-card cheques should be avoided. Here's why:
1. Sky-high interest rates
Now and again, I receive credit-card cheques which charge no interest for a fixed period. For example, I've had 0% credit-card cheques offering interest-free credit lasting up to ten months. However, credit-card cheques usually charge interest rates well above a card's standard rate.
In fact, my latest batch of cheques charges an astronomical rate of 23.95% a year. This is almost five times the Bank of England base rate, currently 5%. Frankly, this is a rip-off rate and, in itself, is enough to consign these cheques straight to the bin!
2. Processing fees
The next problem is that many credit-card cheques charge transaction fees. Typically, these fees come to 3% of the value of each cheque. So, writing a credit-card cheque for £500 could land you with a fee of £15. Indeed, some credit-card cheques are treated as cash withdrawals, which causes you to pay extortionate interest rates and fees.
3. No interest-free period
By always paying off your monthly bill in full, you can enjoy between 45 and 59 days of interest-free credit with a standard credit card. However, with credit-card cheques, there is no interest-free period and, therefore, you start paying interest from day one until your entire balance is paid off.
4. Negative payment hierarchy
When you repay your credit card, your repayments first go towards repaying your cheapest debt, such as a 0% balance transfer. Likewise, your most expensive debt -- such as a credit-card cheque or cash-withdrawal -- will be paid off last.
This `negative payment hierarchy' enables credit-card issuers to maximise the amount of interest charged to your account. The only major credit-card issuer not to operate in this way is Nationwide BS. So, my advice is never to use credit-card cheques alongside low-interest or no-interest credit.
5. No legal protection
When you buy something costing between £100 and £30,000 using a credit card, you gain the protection of Section 75 of the Consumer Credit Act 1974. As I explained in Great News For Cardholders, this legal protection enables you to claim a refund from your card issuer if goods fail to arrive, are damaged or faulty, or don't meet their description.
In other words, your card issuer `stands in the shoes of the supplier' and is equally liable for any breach of contract. Alas, Section 75 does not apply to credit-card cheques. Thus, if you write a credit-card cheque to a company which subsequently goes bust, then you cannot make a claim against your card issuer.
Chuck these cheques!
As you've probably guessed, I'm no fan of credit-card cheques. In fact, I view them as `distressed debt' and would never consider using them except in the direst financial emergency. Hence, for anything other than 0% offers, I suggest you tear up any credit-card cheques and then opt out of any future promotions. Otherwise, the lure of `easy credit' may prove too great...
More: Check our deck of Best Buy credit cards | My Top Two Balance-Transfer Cards | How To Get Money Back When Firms Fail