How do credit card cheques work
You might have thought with the credit crunch, personal debt in the UK rising above GDP for the first time and millions of UK householders facing major financial problems in the years to come - that Britain’s lenders might have developed a whisper of conscience, caution and common sense.
But an unsolicited letter that dropped through my mailbox this weekend reminded me that nothing has changed. Here is my credit card lender, the Halifax, sending me a sheet of credit card cheques - inviting me to start writing them against my Amazon credit card account.
We’ve had the Office of Fair Trading, which has been telling the banks to ‘crack down on irresponsible lending’. The Citizens Advice Bureau has criticised ‘banks lending money to people who unlikely to be able repay their debts’. Even Bank of England governor Mervyn King has slammed banks for ‘risky’ lending.
And it doesn’t get much worse than borrowing cash against your credit card, for this is what we’re effectively being asked to do here.
Am I being unfair? After all, the covering letter tells me that ‘this is a service that many customers find useful’ and that ‘they are particularly useful for times when you are not able to use your credit card’. Although the come-on to use them ad lib is plainly there when I’m told ‘credit card cheques can be used to pay for just about anything’.
But WHY would I do that? If a company or individual won’t accept a credit card, and I DON’T want to pay cash, then why not just write a cheque against my bank account? That, after all, is free - the only possible cost to me is a few days’ loss of interest on the sum leaving my account, and that’s in the unlikely event that your current account DOES pay interest. It certainly won’t be very much.
The ONLY possible reason is that you don’t have sufficient funds in your bank at present (in which case you CERTAINLY shouldn’t be buying credit at over 20%), or you don’t HAVE a bank account and cheque book.
Certainly there are some people in Britain in that boat, but anyone in that shaky a financial state ALSO shouldn’t be borrowing money at over 20%.
In fact NOBODY should be borrowing money at over 20%. Anyone financially astute just wouldn’t do it, which means the only people these dodgy products are aimed at are the financially illiterate or, bluntly, the poor.
Either way, it’s not right. But as we’ve seen time and again, it’s the poorest that pay the most interest. So the financially sussed pay off their credit cards each month, while the lower tiers of society are borrowing at sky high rates - as those are the only rates they can get!
How do credit card cheques work, and more importantly why credit card cheques are a rotten idea?
- You don’t get the interest free period, typically 56 days, that you do with a credit card (that’s assuming you pay off your bill in full and on time). Interest starts racking up from day of purchase (or at best from when the cheque clears). And it gets worse.
- My credit card rate is zero, and when my interest free holiday ends, the standard rate is 15.94%. But these cheques are charged at 21.95%, only marginally less than the rate on cash withdrawals of 22.95%. Horrific! I’d remind the Halifax that Bank of England base rate is 5%. Even with the interbank lending rate a couple of percent above that, this is a startlingly high rate of interest.
- Many recipients will whack on a handling fee, and some banks operate a minimum charge on these cheques. This is often another 2%.
- My covering letter tells me that these cheques ‘do not provide the same level as consumer protection as a normal credit card purchase’.
So one of the BIG pluses of a credit card, that your goods and money are insured, are summarily removed. You’re buying stuff from a company that refuses to take credit cards (odd enough nowadays) and the bank is removing your insurance against faulty goods or getting ripped off? I don’t think I will thanks.
So great was the chorus of disapproval about these dreadful pieces of paper, that there were changes made to the banking code THREE YEARS AGO to say that banks MUST offer customers an opt out.
But get this - the opt out option in my case (and that of my wife who received the same offer, on the same day) came in the letter accompanying the first sheet of cheques. So we couldn’t opt out without receiving them first!
And here is the real security horror. Credit card cheques are sent out unsolicited. Credit card cheques may be in the postal system, with your name on them, and you have no idea they even exist.
Post goes missing, and anyone stealing these can quite easily write a cheque and pay it into an account set up for the purpose. No PIN required, no signature check.
And if they are used to buy goods from an individual it’s a nightmare, as the vendor has lost his goods and you have lost your money. Try clearing that mess up. The first time you realise you’ve been a victim of fraud can be MONTHS later when you have a debt recovery outfit chasing you down.
So do yourself a favour. If you haven’t received CC cheques, call your issuer and tell you NOT to send them to you. And if you have - build a bonfire.
Related: Credit card cheques article, Office of Fair Trading
Tags: credit card cheques, credit card cash, uk banking codes
