Consumers splurge £3.6 billion on credit card cheques

uSwitch.com's credit card cheque investigation has revealed that more than 14.1 million UK consumers have been sent more than 280 million credit card cheques in the last year, 97% of these were unsolicited. 3.2 million of these cheques have been used by consumers spending a staggering £3.6 billion. In total, this has made providers a pocket lining £571 million in handling fees and interest.

However, at a time when UK consumers are struggling with the early stages of a recession and rising food and energy prices, 16% (294,694 people) who use credit card cheques have admitted they have started to use them to pay utility bills. Sadly, as loan rejection rates have soared to 1.55 million in the last six months, it seems almost 130,000 people are using them to consolidate debts. The findings also indicate that almost a quarter of consumers (23%) who use credit card cheques are doing so in a desperate attempt to transfer cash into their current account.

In the last year alone, the average amount that credit card cheques have been written for has increased in value by £165 from £976 to £1,141, indicating that the value of cash consumers are trying to get their hands on is increasing. Unfortunately, temptation is always around as 8% (almost 2.5 million people) receive them once a month and almost one in five (18% or 5.5 million) people receive them twice a year.

The real cost

uSwitch.com analysis has indicated that the average handling fee charged by providers is 2.5%, which equates to £28.49 on the average cheque written for £1,141. Assuming that the consumer pays off this amount over a 12 month period, the interest charged to use this cheque, at an average APR of 26.7% the total charges incurred would be £150.07 totalling £178.56 for every cheque used.

Lack of consumer understanding

However, there appears to be a continued lack of consumer understanding about the cost of using credit card cheques as 86% (1.5 million) of credit card customers who use these cheques do not know what the correct fees are. Over one in ten people (11%) believe there is no fee whilst 23% of people admit they do not know. 13% of customers wrongly believe that there is a standard interest free period, along with a standard purchase APR and 39% incorrectly believe there is a handling charge and a standard purchase APR along with the standard interest free period.

Louise Bond, Personal Finance Manager at uSwitch.com, said: "It is both alarming and concerning that so many consumers believe these cheques are ‘friendly freebies'. There are huge fees and interest rates associated with using them, which consumers need to be more aware of - particularly if they are using them to pay household bills or consolidate any debts. One of the biggest concerns however is that year on year the number of unsolicited cheques being sent out has stayed consistent, 13.7 million have been issued in the last year to people who did not ask for them.

"I think what we are seeing are more and more credit card customers using credit card cheques as a quick fix solution to not having ready available cash, but they should only ever be used as a last resort. The concern is that more people could turn to them in the run up to Christmas, and over the next year, as the recession begins to set in and consumers find themselves more cash strapped. However these quick fix solutions could turn into serious financial hangovers as they are one of the most expensive ways for people to get their hands on cash."

Section 75 protection

Section 75 of the Consumer Credit Act 1974 protects consumers using a credit card for purchases between £100 and £30,000 in the UK and overseas. Credit card cheques do not offer consumers this protection, which is concerning for the 8% of customers who have used them to pay for a holiday and 10% of customers who have used them to pay for items such as a TV or sofa.

uSwitch.com continues to call for the banning of unsolicited credit card cheque mailings to consumers by providers, as well as greater consumer education on the fees and charges involved.