Credit Card Cheques - An Expensive Convenience
When most people think about credit cards, they first think of a
rectangular piece of plastic that is physically swiped in a machine
when you make a payment. In recent years however, there has been an
increasing trend towards borrowing on your account without actually
using your card, originally by quoting your account number over the
telephone, and more recently when shopping online.
Add to this the ability to withdraw cash using your card, and nowadays a credit card account is perhaps better thought of as a more general line of credit you can use in many situations, rather than simply a convenient payment method. Credit card cheques are a natural extension of this idea, but they have attracted a fair amount of controversy - not least over the amount they cost.
So what are Credit Card Cheques?
Credit card cheques are similar to a traditional bank cheques in that
you make them out to the company you're paying, and sign for the amount
to be taken from your account. Card issuers say they are useful for
using your credit account in situations where plastic can't be used -
for example, paying a utility bill by post.
The crucial difference is that with a credit card cheque, you're adding to your card debt rather than simply transferring funds from your bank account, and this kind of debt is usually significantly more expensive than that arising from general credit card use.
Firstly, most card issuers treat cheque payments as a 'cash advance' and charge a percentage handling fee of the amount of the cheque, usually at a rate of around 2.5%. This in itself makes the cheques a rather expensive proposition, but there's more to come - the interest rate will also usually be much higher than the purchase rate of your card.
It's not unusual for cheques and cash advances to be charged at rates higher than 20%, even if the purchase rate of your card is closer to 10%. While this difference may not seem significant, especially if your cheque was for a small amount, a process known as 'allocation of payments' means it can be very important indeed.
Each repayment you make to your card will be used to pay off your cheaper debt first. So, if you're carrying a balance you built up through purchases, your cheque debt will effectively go to the back of the queue and will sit in your account, happily attracting interest at the higher rate. It's not until you clear all your purchases and balance transfer debt that you start to repay the cheques.
Credit Card Cheques are Expensive
This means that if you use cheques regularly, a significant amount of
the interest you're charged will be at the higher rate, and it will
take much longer to repay your card balance, a fact which critics say
isn't made clear enough on the cheques themselves. This lack of clarity
has led to calls for a ban on sending out cheques as a matter of
course, so that a customer has to specifically ask for them to be
So should you use credit card cheques at all? It's not a cheap form of credit, especially if you are carrying a balance on your card, and this needs to be weighed against any convenience aspect. In any case, it's perhaps a little ironic that after decades of being told that plastic was more convenient than cheques, some card companies are now saying the opposite - and profiting handsomely in the process.
Best Buy Credit Cards
Check out the table below for the current Best Buy Credit Cards, as researched by MoneyExtra
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