What Is a Credit Card Check?
Have you ever received blank checks from your credit card issuer? These periodically arrive in the mail, even if you don't request them.
Your credit card company may say these checks are an opportunity. You can use them to pay down other debt or transfer balances. You can even use them to make purchases up to a certain amount.
And they'll also give you a nice low introductory rate when you use them!
Are you asking, "what's the catch?" You're smart to wonder.
Credit card checks can be tempting. But before you take advantage, know exactly what you sign up for when you write that check. Here's what you need to know.
What Is a Credit Card Check?
Credit card checks are blank checks sent in the mail by credit card companies. They're also known as "convenience checks" or "balance transfer checks".
They look like regular checks. You can use them in the same way, too. You write the check to a business or entity that accepts that form of payment to transfer money.
The checks offer many purchasing options unavailable through traditional credit card use. For example, you can write a check to yourself and deposit it like cash into your bank account.
Of let's say you have another high-interest credit card. You can use a credit card check to transfer the balance for a more favorable rate.
And credit card companies work hard to incentivize you to use the checks they send. They might offer 0% interest on purchases or balance transfers for a promotional period. The promotional period is usually six months to more than a year, depending on the strength of your credit.
Use with Caution: These Checks Aren’t Like Cash!
Unlike a normal check, credit card checks aren't tied to a cash bank account. Instead, they're connected to an existing line of credit - your credit card.
Making a purchase or payment with a credit card check is like taking out a cash advance on your credit card. Depending on the terms of your card, that could lead to high fees and even higher interest rates.
Interest rates on cash advances are not the same as the regular interest rate on your credit card. They're usually 1% to 10% higher.
Again, depending on the terms of your card, that interest rate might compound at a different rate. Some lines of credit compound the interest rate on your cash advance daily. That could end up costing you far, far more than you initially made that check out for. Proceed with caution. Just because a credit card check looks like a normal check, it's not.
How Payments Work When Using a Convenience Check
Credit card companies are in the business of making money. It's in the best interest of their bottom line to keep high-interest rate balances around as long as possible. One way to do this? Treating charges made with your credit card differently than payments made with convenience checks.
Purchases made using your card fall into one category with one interest rate. Cash advances fall into another one. (And that usually comes with a higher interest rate.) Special offers that come with promotional rates fall into yet another.
Here's what happens when your credit card balance includes charges with various interest rates and you make a minimum payment. By default, the credit card company applies your payment to the balance with the lowest interest rate first.
Credit Cards: Different APRs on Different Balances
|Credit Card Interest Rates||15.99% APR on Purchases, 0% APR on Balance Transfers||0% APR on Purchases, 15.99% APR on Balance Transfers||15.99% APR on Purchases, 4.99% APR on Balance Transfers||15.99% APR on Purchases, 15.99% APR on Balance Transfers|
|Interest Charged on Purchase Principal||$65.71||$0||$65.71||$65.71|
|Balance Transfer APR||0%||15.99%||4.99%||15.99%|
|Balance Transfer Principal||$5000||$5000||$5000||$5000|
|Interest Charged on Balance Transfer Principal||$0||$65.71||$20.51||$65.71|
|End of Month Principal Owed||$10,000.00||$10,000.00||$10,000.00||$10,000.00|
|Total Interest Charged on End of Month Principal||$65.71||$65.71||$86.22||$131.42|
|End of Month Balance Owed||$10,065.71||$10,065.71||$10,086.22||$10,131.42|
|Total Monthly Payment||$500||$500||$500||$500|
|- Portion of Monthly Payment Toward Lowest-APR Balance||$165.71||$165.71||$186.22||$231.42|
|- Portion of Monthly Payment Toward Highest-APR Balance||$334.29||$334.29||$313.78||$268.58|
|New Purchase Principal||$4,731.42||$4,834.29||$4,751.93||$4,815.71|
|New Balance Transfer Principal||$4,834.29||$4,731.42||$4,834.29||$4,815.71|
|New Total Balance||$9,565.71||$9,565.71||$9,586.22||$9,631.42|
Since cash advances have higher rates, those minimum payments aren’t applied to that balance. They're applied to the other, regular charges with the lower interest rate.
This is why it's critical to pay more than the minimum on your balances - especially if you use a credit card check. If you only make the minimum payment, the cash advance will take much longer to pay off.
That costs you more money in the end. The longer you let a high-interest rate balance sit around, the more you'll ultimately end up paying.
The Differences Between Types of Convenience Checks
Convenience checks sent by your credit card company don't work the same way as checks tied to your checking account. Not only that, there's also more than one type of credit card check you can use.
There are generally two types of checks that you can expect to receive from a credit card issuer. You can receive and use a cash advance check or you could get a balance transfer check.
Here are the differences between the two.
What to Know About Cash Advance Checks
Credit card checks issued with a cash advance option allow you to access cash from your line of credit. This is in exchange for a fixed fee and higher-than-normal interest rates.
There are some major downsides to using cash advance checks:
They Come with Upfront Fees
When you use credit card checks for a cash advance, you'll pay a fee. The fee ranges from 2% to 5% of the check amount. The fee gets added to the balance on your line of credit. That means you'll pay interest on the full check amount and the fee.
They Don't Come with A Grace Period
If you pay off your balance in full at the end of the month, you may get a grace period during which no interest accrues. If you use a credit card check for a cash advance, you lose the grace period option. Interest accrues immediately.
They Come with Higher Interest Rates
Interest rates for cash advances are often much higher than the normal APR. The average variable credit card rate for purchases was 16.17% as of August 2016. In contrast, rates on cash advances can be up to 29.99%.
Balance Transfer Checks Offer a Better Deal
Of the two types of credit card checks, balance transfer checks offer more favorable conditions. They usually come with a low interest rate offer for a period of time. That can help you pay down your debt and save money.
But you have to commit to paying down your debt within the promotional period. Otherwise, the interest rate goes up and may be more than the interest rate you had before the transfer.
Regardless of any potential benefit, there are downsides here too. Know that balance transfer checks can also include a fee that ranges from 2% to 5%. That fee depends on the credit card company and your current credit score.
Are There Any Upsides?
Despite higher interest rates and fees, there may come a time when you want to or need to use a credit card check. In some situations, doing so can be helpful.
Using Convenience Checks to Consolidate Debt
For example, if you want to consolidate debt, you can do so with a balance transfer check. You could save a lot of money if you move your existing balances onto one card with a lower interest rate.
But remember: that low interest rate is due to a promotion and it's a limited time deal, so make a debt repayment plan now.
And remember to account for a balance transfer fee!
Taking Advantage of Payment Flexibility
Credit card checks offer a lot of flexibility. Let's say you work with a contractor on home renovations or you shop somewhere that does not accept credit cards. Using credit card checks gives you another option.
The cost of doing business this way is a more expensive option. Be sure to account for that so you can plan for the added costs.
But that's not a hard and fast rule. If you pay the balance off immediately, that might be better for you than other methods of financing (like taking out a loan with collateral on it, for example).
Disadvantages Often Outweigh the “Convenience” of Credit Card Checks
The downsides of convenience checks often make them risky. It's important to fully understand the pitfalls before you use a credit card check.
By understanding the consequences and drawbacks, you can make a more informed decision. Sometimes these checks can act as leverage for your financial situation.
But many times they're just a path to more expensive debt and higher credit balances. Here's more on why they can lead to trouble.
Fees and Interest
Using a credit card check means higher interest rates that begin accruing immediately. You can expect to pay more in total interest over the life of that outstanding loan than you would if you used your credit card directly.
You can also expect to pay fees based on the amount of the check. A common practice is to charge a percentage of the check amount or a minimum fee, whatever is greater.
Credit Score Impact
Credit card checks are an extension of your credit card line. Writing one for payments affects your available credit.
Make sure you don’t write a check that would exceed your credit limit. You may be subject to an over-limit fee which negatively impacts your credit score.
You should aim to keep your credit card balance within 30% of your credit limit. If writing a credit card check forces that ratio up, your credit will suffer as a result.
Less Protection on Purchases
Credit card companies offer a certain level of protection to consumers. For example, you're protected if you need to dispute a charge or if someone uses your card for fraud.
Unfortunately, this protection is not extended to purchases made using credit card checks.
Let's say you purchased faulty merchandise with your credit card and dispute the charge. You can work with your credit card company to remove the charge from your balance. But if you made that same purchase with a credit card check, your only option may be to reach out to the merchant. And they're under no obligation to give your money back.
Should You Use a Credit Card Check?
In most cases, the convenience of a credit card check is simply not worth the cost, and exploring other options is a better route to take. In fact, it’s probably a good idea to just shred these checks as soon as you receive them to avoid the unnecessary temptation and eliminate the risk of fraud if they fall into the wrong hands.
If you still decide to move forward, use extreme caution if you want to stay out of debt. Be sure to read the fine print and don’t hesitate to call your credit card issuer if you have questions.