313m unwanted credit card cheques cause confusion

Monday, 19 November 2007 12:00

The practice of sending unsolicited cheques to customers is continuing and consumer confusion over the cost and charges of the cheques remains.

Last year some 326 million cheques were sent out to card holders by credit card companies - but only four per cent of users asked for the cheques, according to uSwitch.com research.

The average credit card cheque now comes with an interest rate of 27.6 per cent APR - compared with 15.7 per cent for a credit card and 7.97 per cent for personal loans over £7,500.

Despite a ruling from the Department of Trade and Industry last year that credit card cheques could continue to be used if a summary box explained all the costs, 44 per cent of people do not know what charges are in place and 81 per cent did not know rate of interest was charged.

Some six per cent thought there are no charges for the cheques.

Credit card cheques also trip up consumers, besides having higher interest rates, as they have no initial interest free period - as credit card transactions do - and handling fees of around 2.5 per cent.

"Unsolicited credit card cheque mailings raise the big question about card providers' commitment to responsible lending," said Mike Naylor, personal finance expert at uSwitch.

"At the height of the media frenzy surrounding credit card cheques, some providers may have scaled down their promotional activities, but nowadays it would seem that it's 'business as usual'."

The research also raises questions over how able those taking credit card cheques are to repay them.

With lenders tightening loan lending criteria and consumers finding it hard to secure a personal loan, more of those being refused loans will be turning to the cheques, especially as Christmas approaches.

A fifth of credit card cheques are paid into bank accounts, 14 per cent go to household bills and 11 per cent are used to consolidate loans.

"Credit card cheques should only be used as a last resort. Unfortunately, in the run up to Christmas this could be the only option left for many cash strapped consumers," said Mr Naylor.

"There is a danger some of the people targeted with these cheques will already be at risk of falling into over-indebtedness, and the 'convenience' of these cheques, coupled with the manner in which they are marketed by the credit card companies, could push them over the edge."

He added: "No matter how convenient credit card cheques appear, it is one of the most expensive ways to get your hands on cash - with interest rates on average 76 per cent higher than standard rates.

"Using a credit card cheque as a quick fix solution could turn into a serious financial hangover."

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