Warning: credit card cheques could damage your wealth

19/11/2007

One year on from a DTI investigation, a £660 million money spinner for the credit industry still lives on.

In September 2006, the Department of Trade and Industry (now BERR) concluded its investigation into credit card cheques. This stipulated that all credit card providers had to display a summary box explaining the purpose, key features and associated charges of credit card cheques.

However, three key areas of concern still remain: their unsolicited distribution by credit card providers, the lack of consumer knowledge on the costs related with their use, and concerns about whether providers undertake the appropriate checks to asses a customer's suitability and ability to repay before sending them.

The startling facts are these:

 

• 96% of credit card cheques are unsolicited - a total of 326 million cheques were issued last year, of which 313 million were sent without being requested
• 22.5 million consumers (50%) have been sent credit card cheques
  by their provider - just 1 in 50 asked for them
• Using a credit card cheque costs consumers £298 million more in
  interest and charges than a standard credit card purchase.
• The average interest rate on a credit card is 15.7% APR compared
  to 21.7% pa (equivalent to 27.6% APR) on a credit card cheque - making the APR 12% higher.
• The average value of a cheque is £976 which costs the consumer
  around £73 in charges and interest
• One in three people receive credit card cheques at least twice a
  year.

Credit card cheques are making the industry a lucrative £660 million a year and now uSwitch.com, the independent price comparison and switching service, has called for a ban on unsolicited cheques and more prominent tobacco-style “health warnings”.

New research from uSwitch.com reveals that in the last year, the voluntary “warning” system has failed so badly that fewer people that whereas, in June 2006, 25% of people were oblivious to their high interest rates and charges, today, this has almost doubled to 44%.

Despite the astronomic cost of using these cheques, a staggering 22% used their credit card cheques to pay money into their bank account, while 14% used them to pay household bills,11% for debt consolidation and 4% to pay for everyday household goods. If consumers had not found these cheques on their doormats, 16% would have opted to use a standard cheque or cash as their main method of payment and 15% would have used a debit card - saving themselves a small fortune in fees and charges.

Mike Naylor, Personal Finance Expert, at uSwitch.com says: "Unsolicited credit card cheque mailings raise the big question about card providers' commitment to responsible lending. In 2006, the OFT suggested that the practice of issuing unsolicited credit card cheques should be banned, but this was never implemented. In fact, the DTI ruled out the option, and instead imposed an 'opt-out'.

"During 2006, some providers may have scaled down their promotional activities, but nowadays it would seem that it's 'business as usual'.

"It is easy to see how credit card cheques can appear a very attractive option for borrowers who are desperately in need of money, but no matter how convenient they appear, it is one of the most expensive ways to get your hands on cash - with interest rates on average 76% higher than standard rates. Using a credit card cheque as a quick fix solution could turn into a serious financial hangover."

To check if switching your credit card supplier could save you money, click onto the website below.

Relevant links

• uSwitch (Opens a new window)