Credit card cheques - friend or foe?

Posted in 'Banking' by Barry Stamp

15 July 2009

Once again, credit card cheques are coming under fire. A new Government White paper proposes reforms, which are planned come into effect early next year, to stop credit card companies from sending out credit card cheques to borrowers, unless they ask for them.

But are credit card cheques really such an awful thing?

Critics argue that the sending of unsolicited credit card cheques cause consumers to dig themselves deeper into debt. This was dismissed as untrue by a recent Department of Trade and Industry investigation into credit card cheques. In November 2006, the DTI reported, "we did not find any hard evidence that consumers are being plunged into debt from using credit card cheques". After all, credit card cheques don’t increase credit exposure, as the monies are taken from within an existing credit limit.

Critics also argue that borrowers are charged far more than they may realise, and the DTI report addressed this to an extent by introducing the ‘Summary Box’ on credit card application forms and agreements, which set out clearly the costs of using such cheques. Even so, few critics acknowledge that some of the ten credit card companies that issue credit card cheques (Barclays, Capital One, Citi, Cooperative Bank, HBOS, HFC, Lloyds TSB, MBNA and RBS) usually do so with a promotional low interest offer. Most charge a fee of 2-3%, and most, but not all, charge interest at their cash withdrawal rate. But for a businessman under financial pressure faced with a choice of paying an urgent HM Revenue & Customs bill, a credit card cheque is quicker, sometimes cheaper than arranging an overdraft extension at the bank, and if the underlying credit card has the ability to absorb the amount involved, it’s also more assured.

The next criticism is that the use of credit card cheques is not covered by section 75 of the Consumer Credit Act 1974. This gives protection if a payment is made and the supplier fails to supply, goes bust or if the goods are defective. The law makes the credit card provider company liable for payments in excess of £100. The argument goes that because the transactions are treated as cash transactions, they fall outside section 75. Even though this is enshrined within the Banking Code, it is worth bearing in mind that this was written by the industry and the matter is by no means clear. Credit card cheques are exactly the same as normal bank cheques in terms of the definition of the Bills of Exchange Act 1882, and if the result of using a credit card cheque is that credit is taken, which invariably it is, then it can be argued that section 75 should apply just as equally as it would had the same transaction been undertaken on the card. Careful examination of the wording used on official documents makes use of conditional verbs – “should not apply”, “may not apply”. Clearly the position needs to be determined at law – it is at best ambiguous.

There are codes already in place about who can be issued credit card cheques. It is not in the interests of the credit card companies to send them to anyone who is showing any sign of financial stress. Only 16% of cardholders have been sent credit card cheques, and in 2006 only 13% of those recipients have used them, so credit card cheques are a niche product used by only 2% of existing cardholders. In 2008, usage halved to just over 1% - 3.2m cheques were used from a total of 280m issued.

We believe that, used sensibly, and with full knowledge of the costs involved, credit card cheques can be a useful feature of a credit card account and in particular are a good thing to have in reserve for an emergency. If receiving credit card cheques irritates you, then simply ask your credit card company not to send any more, and make the cheques unusable by ripping them each into four pieces. Always be aware of the fee, the interest rate and the fact that interest will be charged from the day the cheque is cashed – there’s no interest free period.

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