Many credit card issuers offer the facility to write a cheque drawn on your credit card account, claiming that this provides a convenient way of using your card in situations where you normally couldn’t do so – for example, paying money to friends or paying local businesses which don’t accept plastic. You can also use them to pay money directly into your bank account giving you access to ready cash.
This sounds harmless in principle, if not exactly a prospect to fill you with excitement. However, things aren’t as simple as they might appear, and there’s good reason to be very wary before making use of the facility.
The first and most obvious reason is that the money you spend on credit card cheques is subject to either a flat fee of a few pounds, or maybe worse a percentage of what you’ve spent, often in the region of 2.5% – not a lot at first glance, but on higher cheque amounts it could work out to be a noticeable amount of cash.
Secondly, cheque spending is charged at a much higher rate of interest than your ordinary purchases. It’s not unusual to see a rate of 25% or even higher applied to cheque spending, and these two factors already make cheques a pretty expensive way to pay.
It gets worse though.
Under a process known as allocation of payments, every repayment you make to your card account will be used to pay of your cheapest debt first. This will normally be the debt you’ve built up by spending, or the remainder of any balances you’ve transferred. Until you’ve paid off all the cheaper debt, your more expensive cheque debt will sit in your account untouched, happily inflating your balance with its high rate of interest.
So should you use cheques at all? It’s frankly quite hard to think of a situation where they’re genuinely necessary, and in fact some issuers have already stopped issuing them after receiving bad publicity. If you’re tempted to use one, especially to pay money into your own bank, just consider if there’s any way at all you can get hold of cheaper cash such as an approved overdraft or a small personal loan, or to pay the bill in another way such as by bank transfer.