Britons bombarded with 313 million[2] unwanted credit card cheques

One year on from the DTI investigation and the £660 million [1] money spinner still lives on

In September 2006, the Department of Trade and Industry (now BERR, formerly DTI) concluded its investigation into credit card cheques.

This stipulated that all credit card providers had to display a summary box explaining the purpose, key features and associated charges of credit card cheques.

However, three key areas of concern still remain: their unsolicited distribution by credit card providers, the lack of consumer knowledge on the costs related with their use, and concerns about whether providers undertake the appropriate checks to asses a customer's suitability and ability to repay before sending them.

96% of credit card cheques are unsolicited - a total of 326 million[2] cheques were issued last year, of which 313 million[2] were sent without being requested 22.5 million[3] consumers (50%) have been sent credit card cheques by their provider - just 1 in 50[3] asked for them Using a credit card cheque costs consumers £298 million[4] more in interest and charges than a standard credit card purchase The average interest rate on a credit card is 15.7% APR compared to 21.7% pa (equivalent to 27.6% APR) on a credit card cheque - making the APR 12% higher[5] 2.1[6] million credit card holders think no charges apply to credit card cheques.

In reality, standard interest rates are 76%[5] higher and the average handling charge is 2.81%[1] The average value of a cheque is £976 [1] which costs the consumer around £73[7] in charges and interest One in three people receive credit card cheques at least twice a year[8],uSwitch.com calls for a ban on unsolicited cheques and more prominent tobacco-style 'health warnings' New research from uSwitch.com, the independent price comparison and switching service, reveals that over 22.5 million[3]consumers (50%) have been sent credit card cheques making the industry a lucrative £660 million[1]a year.

The DTI (BERR) published its findings on the state of regulation of credit card cheques back in September 2006, this resulted in the introduction of a compulsory summary box aimed at explaining associated fees and charges.

In reality, the DTI's (BERR) 'do nothing approach' has proved that self-regulation by the credit card industry has failed to address all of the concerns originally raised by the Treasury Select Committee back in 2003.

The measures were supposed to increase levels of awareness amongst cardholders of the key features of credit card cheques - such as charges and interest.

Put simply, the introduction of the APACS voluntary code of practice (reflected in the Banking Code) and the summary box have not achieved what they set out to do.

uSwitch.com's findings show that in the last 18 months, there has been a decrease in the level of consumer awareness in relation to the costs associated with using credit card cheques.

In June 2006, 25%* of people were oblivious to their high interest rates and charges.

Today, this has almost doubled to 44%.Unsolicited mailings.The APACS best practice guidelines clearly stipulate that issuers should undertake appropriate checks to assess a customer's suitability and ability to repay before mailing credit card cheques.

In 2006, 326 million cheques were issued to consumers and 4.1 million were used.

Our latest research shows that 96% of these were not requested by the recipient - in fact just 2% were.

Over a third (34%)[8] of credit cardholders receive these mailings at least twice a year, but nearly one in ten (9%) of these are practically bombarded and receive a mailing as often as once a month.

Following its investigation, the DTI ruled out the possibility of banning the unsolicited mailing of credit card cheques on the basis that "this would be a disproportionate measure given the industry's commitment to carry out appropriate checks concerning the prospective consumer's credit worthiness before sending out any credit card cheques".

Due to the huge volume of credit card cheques being issued we would question whether credit card companies' are able to carry out meaningful checks on each recipient's credit-worthiness.Sending out so many cheques pays dividends for providers with 4.1 million people using them to spend a staggering £4 billion[9], this money spinner generates £660 million[1] a year for the industry.

The additional charges and interest on most cheques have obviously developed into a significant source of revenue for the credit card companies, and it is far more likely that this is the reason why there is strong opposition from the industry to ban unsolicited credit card cheques.Mike Naylor, Personal Finance Expert, at uSwitch.com says: "Unsolicited credit card cheque mailings raise the big question about card providers' commitment to responsible lending.

In 2006, the OFT suggested that the practice of issuing unsolicited credit card cheques should be banned, but this was never implemented.

In fact, the DTI ruled out the option, and instead imposed an 'opt-out'."During 2006, at the height of the media frenzy surrounding credit card cheques, some providers may have scaled down their promotional activities, but nowadays it would seem that it's 'business as usual'.

The reality is that the credit card industry has far more to lose than consumers if people had to 'opt-in' to receive credit card cheques.

Going forward, we would like to see the regulatory bodies pull together to stop unsolicited mailings and allow consumers to make their own minds up as to whether they want to receive credit card cheques or not."Lack of consumer awareness on costs.Alarmingly, the research shows that half the people using credit card cheques are not aware of the costs involved in using them - 2.1 million[6] people think there are no charges at all and 15.4 million[10] (44%) simply don't know.

The charge is typically 2.5% - 3% or £27 on the average amount spent on each cheque (£976)[1].

In addition, 81% don't know what interest rate cheques incur.

This frightening lack of knowledge among consumers could leave them stung by costs of around £73[7] each time they use a credit card cheque.

Of those who think they know what the interest rate is on a credit card cheque, 16% think it's 0% and nearly one in five (19%) think it's the same as the purchase APR on their card.

A staggering 83% of people who've received credit card cheques don't know that there is no interest free period on transactions.What makes people use themCredit card cheques should only be used as a last resort, but the research found that hardly any of the people who used them did so in an emergency.

Only 18% have used them to pay a tradesman who would not accept a regular credit card payment.

A staggering 22% used their credit card cheques to pay money into their bank account, while 14% used them to pay household bills, 11% for debt consolidation and 4% to pay for everyday household goods.

If consumers had not found these cheques on their doormats, 16% would have opted to use a standard cheque or cash as their main method of payment and 15% would have used a debit card - saving themselves a small fortune in fees and charges.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, but over one in five (21%) people believe they do and 64% don't know.Naylor concludes: "Credit card cheques should only be used as a last resort.

Unfortunately, in the run up to Christmas this could be the only option left for many cash strapped consumers.

There is a danger that some of the people targeted with these cheques will already be at risk of falling into over-indebtedness, and the 'convenience' of these cheques, coupled with the manner in which they are marketed by the credit card companies, could push them over the edge."It is easy to see how credit card cheques can appear a very attractive option for borrowers who are desperately in need of money, but no matter how convenient they appear, it is one of the most expensive ways to get your hands on cash - with interest rates on average 76%[5] higher than standard rates.

Using a credit card cheque as a quick fix solution could turn into a serious financial hangover." For more information visit www.uSwitch.com or call 0800 093 06 07.

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