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"Convenience Checks" Carry a Heavy Price Tag

You Pay Very Dearly for the Convenience

By Martin H. Bosworth
ConsumerAffairs.com

October 12, 2006

• Credit Tips And Tricks • Get Control of What You Owe • No Easy Way Out Of Credit Card Debt • Penalty Fees, Interest Rate Hikes, and Misleading Contracts Await Credit Card Shoppers • "Convenience Checks" Carry a Heavy Price Tag • Understanding Credit • Credit Bureaus: Who You're Dealing With • Reading Your Credit Report • Credit Scoring: The Fickleness of FICO • Credit Knowledge: A Long, Hard, Struggle --- News • New Credit Card Rules Take Effect February 22 • Credit Card Direct Mail Back on the Rise • FTC Urged To Place Tighter Controls On 'Free' Credit Reports • Attorneys General Warn of 'Free' Credit Report Confusion • Retailers: Hidden Credit Card Fees Cost Jobs • Interchange Fees Fleecing Consumers, Retailers Say • Minnesota Sues Clinic For Credit Card Fraud • Retailers Applaud GAO Report On Interchange Fees • Schumer Moves to Clean Up Credit Reporting Ads --- • More about credit cards

"Convenience checks" -- those allegedly free checks that enable you to spend money that's borrowed from your line of credit -- are anything but.

Even the most tempting offer is laden with hidden fees and traps that make the risk far greater than the reward.

Most alarming, convenience checks start accruing interest on the balance immediately from the time it's drawn -- unlike credit card charges, which are interest-free if you pay them off before the due date.

Some card issuers may charge hefty fees just to issue the check -- often as much as 2 to 5 percent of the check amount. As the interest rate information is often not listed on the check itself, cardholders will have to talk to their bank to get the fine print.

Worse yet, if your card has an existing balance, any payments you make will be applied to the lower balance first, at your current interest rate, before they are applied to the convenience check balance.

That means the balance will continue to accrue unpaid interest as long as you use the card to make purchases.

Scott T., of Los Angeles, wrote ConsumerAffairs.com asking if his drawing an advance check from his card meant he'd just been scammed.

"I thought that I had no other charges on the card that month, but I was wrong," he said. "I had about $200 in other charges."

"So, when the statement came in I sent the credit card company two checks, with instructions to apply one to the $200 in charges that month and the other ($1000) to the cash advance," Scott said.

"The paperwork that came with the interest free check said that the card issuer generally applies the money received to the lowest interest-generating balance first, but 'generally' is not the same word as 'always.'"

Emily Davidson, who writes for the Creditbloggers.com money and finance blog, looked into Scott's predicament.

"The [bank] representative told me that it is their policy to apply all payments to the balance with the lower APR before the paying off any balance with a higher APR," she told ConsumerAffairs.com. "I believe that most issuers have the same policy. It sounds like your reader is going to have to pay back all $10,000 before he can pay off the $200."

"This case really demonstrates what a terrible trap those paper 'checks' can be," Davidson said. "Any sort of late payment or default will usually cancel the 0% promotional rate and will often cause you be to charged back-dated interest."

The Motley Fool's Marko Djuranovic crunched the numbers on what a $10,000 convenience check from his credit line might cost him in an article last year.

According to Djuranovic's calculations, after all the hidden fees, accumulated interest, and minimum payments due, he'd have to pay at least 38 percent of the total borrowed amount back within two years, or risk accumulating charges pushing his balance to $12,000 or higher.

Djuranovic had been thinking of using the convenience check to make a short-term investment, hoping for a quick profit but his calculations scotched that idea.

"This negates the point of my original idea as there is no remotely reasonable rate of return that can fulfill that promise," he said. "I don't mind a little risk, but I'm not crazy!"

More Hidden Danger

But excessive fees and high interest rates aren't the only peril that comes with convenience checks. Because it's a blank check written to you from your bank, if it falls out of your hands, identity thieves can use the check to treat themselves to anything they want -- with your money.

Although some lenders such as American Express require a check holder to call in to activate the check, many others do not. And the federal laws that protect credit card users from fraud don't always extend to convenience checks.

Credit analysts recommend shredding and destroying any convenience checks you receive in the mail, to avoid "dumpster divers" piecing together your identity and using your credit line to go on a shopping spree.

Given the expenses, the hidden traps, and the dangers that can come with "convenience checks," it seems safer to call them "inconvenience checks."

If you need cash, find it somewhere else. Otherwise, you'll be paying a very high price for a the supposed convenience.

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