You didn't ask for it, so do you need this credit gift?
A card cheque arrives in the post and Christmas seems like a good time to use it. But it can be costly
Sunday 11 December 2005
A cheque in the post from your credit card lender might look like an early Christmas present, but beware - these gifts are not all they seem.
Often choosing holiday periods when people might be running a little low on cash, banks and card providers send unsolicited credit card cheques to customers accompanied by marketing material encouraging them to spend.
The cheques may seem a useful alternative to plastic - to settle up with a tradesman, say, when you can't use your card - and they also let you pay credit straight into your current account. However, expensive downsides outweigh any value.
The annual percentage rates (APRs) charged are likely to be well above 20 per cent on any purchases, according to research from the financial-comparison service Moneysupermarket.com, and each cheque usually incurs a 2 per cent handling fee.
When you use one, you don't benefit from the usual 56-day interest-free period. Even if you clear the debt early, you'll still pay interest.
And crucially, you don't get the same consumer protection as with a credit card: if the goods or services turn out to be shoddy, you won't have the support of the Consumer Credit Act 1974, which lets you pursue your lender when seeking a refund.
MPs on the Treasury Select Committee are highly critical of the cheques and concerned that they fuel indebtedness. "These cheques can really trip people up as they think they work in the same way [as normal cheques] and won't cost anything," says Susan Kramer, Liberal Democrat member of the committee.
The cheques have now come under fresh government scrutiny. Last month, the Department of Trade and Industry (DTI) launched a consultation on regulating their use and improving consumer awareness of how they differ from credit cards.
Options being considered include printing the APRs and fees clearly on either the cheques, or on attached documents.
This consultation is part of wider-ranging reforms being considered for the UK's consumer credit regime. "It's a step in the right direction," adds Ms Kramer. "I just hope it is going to be well received."
Consumer body Which? has campaigned against the cheques and says the consultation does not go far enough. It is disappointed that the DTI has failed to look at an outright ban.
"The danger is that these cheques - pushed without any clear advice - are usually treated as a cash advance. Therefore, they attract interest from the day they are used," says spokes- woman Emma Bandey.
Which? wants clearer health warnings to be attached to these products. "Consumers should be able to choose to opt in to receive them - and not opt out, as is the current situation," she adds.
As it stands, credit card customers can be sent these cheques without making any direct request for them.
A third of British people with credit cards have at some point received one of these unsolicited cheques, according to new research from insurer More Th>n, and a fifth of the survey sample of 1,010 customers felt they had been encouraged to use them.
Alarmingly, nearly a fifth thought the cheque APR was the same as for regular spending on the credit card itself.
Users of the NatWest Classic card and Royal Bank of Scotland Classic Visa, for example, face an APR of 16.9 on their card; on the cheque, it's 23.01.
Elsewhere, the Halifax's One Visa has a cheque APR of 21.95 (card, 15.9), while Barclaycard Platinum Visa has a cheque APR of 21.9 (card, 17.9).
Peter Tutton from Citizens Advice, the consumer support group, says: "We think the cheques should only be issued to people who have requested them - and only then if people are made aware of how they work and what the risks are."
There's a critical security issue too, he says, when cheques are mailed to people who aren't expecting them: "As the post may be intercepted, the cheques may be used fraudulently."
However, providers defend the cheques as a useful tool for consumer spending. A spokes- woman for Royal Bank of Scotland says they are offered to cardholders as they can be used in places that don't accept plastic. Some 80 per cent of small traders listed in Yellow Pages, the bank reports, fall into this category.
"Cardholders can opt out at any time," she says. "We adhere to guidelines from the Association for Payment Clearing Services and are transparent in providing clear information regarding the APR and fees."
The cheques come with a clear warning that, if they use them, cardholders do not have full protection under the Consumer Credit Act, she adds.
But critics remain to be convinced. "It is easy to see how tempting the cheques can be - especially for those consumers without a lot of spare cash in the run-up to Christmas," says Richard Mason, director of Moneysupermarket.com. "But the perceived convenience is totally outbalanced by the significant costs that can result."
He claims that, in many cases, people are encouraged to use the cheques for everyday spending, or to treat themselves.
"Consumers can get drawn into borrowing money in a very expensive way. If you receive these unsolicited cheques, destroy them immediately."
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