Credit Card Cheques Are Costly

With the global credit crunch hitting consumers hard, banks are grabbing every opportunity available to pass on increased interest rates especially on overdrafts. Many of these banks are also offering their customers credit card cheques which attract exorbitant interest rates.

According to recent reports, leading lenders are increasingly taking advantage of the growing debt levels among Brits even after the Bank of England reduced the base rate by 2.75 points in the past year, to as low as 3 percent.

Reports suggest that banks have raised their over draft interest rates by more than 7 points which leaves many of their customers who are already hard hit by the crunch with interest rates charges that average at 17 per cent.

Crunch time but not for banks

High cost of energy, petrol and rising cost of food has left many British families struggling to cope with the impact of inflation as a result, overdrafts are becoming an attractive form of credit. Additionally, many people are finding it increasingly difficult to meet the rising cost of new mortgages.

There is concern among industry sources that many consumers who rely on credit cards see the cheques as 'friendly freebies' not knowing that they attract huge fees and interest rates associated with using them especially when the cheques are used to offset household bills or consolidate any debts.

Statistics show that banks have sent more than 280 million credit card cheques to their credit card consumers in the past year, a significant number of these cards are unsolicited.

But, what is even more worrying is the thought that more people are likely to opt for such quick fix methods of financing their way during the crunch particularly during the Christmas festivities. Sadly, this could throw them deeper into financial crisis as the economy settles into recession.

Banks cashing in

According to latest studies, financial institutions are now grabbing every penny out of crunch hit households. Market analysts say that banks that are raising overdraft interest rates only make it worse for consumers struggling to cope with credit crunch.

A study by uSwitch found that £3.6billion has been spent with the cheques in the last one year alone and lenders have collected more than £571million in interest and charges. Reports suggest that the average handling fee is now reached 2.5per cent, which equates to £28.49 on the average cheque value of £1,141. At the same time, the average interest and charges for each cheque used amounts to £178.56.

Abbey, Barclays and the Co-rp, have increased their overdraft interest rates by an estimated 2-points over the past 12 months. Others who have followed suit include Smile, Nationwide and First Direct. This means that a consumer with £500 overdraft at 17per cent interest rate pay £85 annually and in case of a two-point increase, this figure could rise by an extra £10.

Other figures show that rates at the Clydesdale Bank and Yorkshire Bank have gone up by 7.31 points to stand at 16.95 per cent. Statistics also show that an estimated 423,000 people have used one of these cheques despite the huge fees and interest rates attracted by this facility. Some 300,000 credit card consumers have also used the cheques to offset a utility bill.