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0% APR Credit Card Checks Are Risky

The next time your credit card company mails you promotional checks, you may want to toss them in the shredder. These “convenience checks,” which generally offer low or 0% rates on balance transfers or cash advances, are used by credit card companies to generate 3 to 5% transaction fees and interest income on transferred balances once the promotional rates expire. Unfortunately, there is not only a possibility that these checks may bounce, but there is an even greater chance that you may end up reaping little financial benefit from these seemingly generous deals.

Bouncing promotional checks have created substantial headaches for consumers in the past few years. Many people have written out checks believing they had enough available credit to cover the transactions, only to find that their credit limits were reduced before the checks cleared. This has led to returned check and late fees as well as credit and banking report damage.

In June of 2009, American Express settled with the FDIC over charges that it failed to provide consumers with timely notice of credit limit reductions that caused convenience checks to bounce. Following the settlement, American Express ceased offering the checks.

Most other credit card companies continue to offer promotional checks and some of these checks might still be made of rubber. This problem impacted a number of Chase cardholders in late 2009 and will continue to be an issue for consumers as long as credit limit cuts remain a major risk management tool for credit card companies.

If the fear of a bounced check doesn't make you think twice about utilizing promotional checks, the way credit card companies allocate your monthly payments might. This is particularly true if you carry a balance on your credit card that is higher than the promotional rate being offered.

The CARD Act permits credit card companies to allocate monthly minimum payments however they wish. For example, if you owe $2,500 at a 15% interest rate and use a promotional check to transfer $2,500 of debt at a 0% rate, your credit card company can use the entire minimum payment to reduce the 0% balance. Meanwhile, you will continue racking up interest on the balance being charged 15%.

With a $5,000 combined balance, monthly minimum payments could be $150. Over the course of a year, a person who only pays the minimum could wind up reducing the 0% portion of his balance by $1,800 while racking up close to $400 in interest on the portion being charged 15%. Thus, even if you don't encounter rubber check problems, you still may end up saving far less money then the alluring low rate offers led you to believe.

To avoid headaches and reap the greatest benefits from 0% rates, only use promotional checks on a credit card with no outstanding debt. If you already have debt on your card, seek out a new one that offers 0% APR balance transfers to avoid getting trapped by unfavorable payment allocation practices.

For more information on current offers, please see the 0% APR credit card offers section of Card Wisdom.


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