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Fresh waves of potentially risky credit card cheques are being sent to households as lenders exploit the dwindling availability of new credit to tempt existing borrowers to spend.
These controversial payments are usually unsolicited and carry fees as high as 3%, leave users without valuable "Section 75" consumer protection and often charge sky-high interest rates in excess of 20%.
Consumer group Which? and price comparison site Moneysupermarket.com report a surge in lenders issuing credit card cheques for balance transfers over the past few months, apparently to try to bolster their bottom line.
"Credit providers are now targeting existing customers, knowing that lending elsewhere is getting tighter. It's a way to maximise their book," says Steve Willey of Moneysupermarket.com.
Readers have voiced their concern to Cash about mailshots from Sainsbury's bank and Citigroup that offer existing customers cheques to spend or use as "balance transfers".
The Sainsbury's promotion suggests that its credit card cheques be used to pay off debts at rival credit cards - in effect using the cheques to switch the balance to the Sainsbury's card at 5.94% for the life of the balance - or for "club memberships, home improvements, university fees, or a gift for a relative".
Although the rate is low by most cards' standards, it rockets to 19.95% if the offer is taken up after 20 February and levies a 3% fee regardless.
"I can't believe banks are still trying to get us to spend money we haven't got," says reader Hannah David, of Hackney, north London, who found four unsolicited Sainsbury's bank cheques in her post. "Worse, I didn't ask for them to be sent to me and know they'll stick me with a socking great fee if I were to use them. It's despicable."
Lenders have come under heavy fire for mailing the unsolicited cheques, which, it is feared, could give a boost to ID fraud if intercepted, as they can be easily spent without the original cardholder having any idea that a crime has been committed.
Martyn Saville, senior researcher at Which?, says lenders continue to rely on borrowers' ignorance of how the cheques work. "The problem is that people see them as normal cheques and, if their finances are a bit tight, will think, 'I'll use this as a delayed payment,' believing it's a normal cheque when it absolutely isn't."
"With their lack of Section 75 [protection] and high fees, they're a massive no-no. If you're after a balance transfer, ask your existing credit card lender if you can switch debts from rival cards."
Barclaycard, for example, allows existing customers to transfer debts from rival cards at 6.9% with a 2.5% fee.
Credit card cheques have been called a "scourge" by Labour MP James Plaskett, a former member of the Treasury select committee who tried in vain to have them outlawed in an amendment to the Consumer Credit Bill.
In November, research by price comparison site Uswitch.com suggested that lenders earned £571m annually in fees and interest from credit card cheques, and that hundreds of thousands of consumers were using them to pay gas and electricity bills. The average cheque size of £1,141 gives lenders an average £28.49 fee per cheque used, assuming an average 2.5% fee.
However, according to Apacs UK payments body, the number of credit card cheques sent out and used by borrowers is now on the wane.
The Office of Fair Trading is examining credit card cheques as part of a review of lending practices by banks and building societies. It aims to devise a clearer definition of irresponsible lending and a way to stamp it out.
The key focus is to ensure credit card cheques are not sent to cash-strapped individuals who cannot afford to repay them, or won't use them properly.
In 2006, a Department for Business, Enterprise and Regulatory Reform consultation ended by forcing the industry to make credit cheques more transparent and introduce a summary box on the charges and drawbacks of using these products. All credit card cheques must now make clear to customers that they can opt out of such mailshots, usually by calling an expensive 0870 telephone number, and that they won't get the same amount of consumer protection as from a normal credit card.
• Have you received unsolicited cheques from your credit card provider? Do you intend to use them? Email us at cash@observer.co.uk
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