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 checks are a natural extension of this idea, but they have attracted a fair amount of controversy – not least over the amount they cost.
Credit card checks are similar to a traditional bank checks 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 check, 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 check payments as a 'cash advance' and charge a percentage handling fee of the amount of the check, usually at a rate of around 2.5%. This in itself makes the checks 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 checks 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 check 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 check 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 checks.
This means that if you use checks 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 checks themselves. This lack of clarity has led to calls for a ban on sending out checks as a matter of course, so that a customer has to specifically ask for them to be issued.
So should you use credit card checks 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 checks, some card companies are now saying the opposite – and profiting handsomely in the process.