What Is a Credit Card Check and How Do They Work?
Learn how credit card checks work, their practical applications, and crucial financial implications for your credit.
Credit card checks are a financial tool provided by credit card companies, allowing cardholders to access a portion of their credit line. These checks are distinct from standard checking account checks as they draw funds directly from your credit card’s available credit, rather than from a bank deposit account. Credit card checks are often referred to as convenience checks or cash advance checks.
Understanding Credit Card Checks
Credit card checks are physical checks that resemble traditional bank checks but are tied to your credit card account’s available credit limit. Issuers typically send these checks to cardholders, sometimes unsolicited, or they can be requested. When you write a credit card check, the amount is drawn from your credit card’s cash advance limit, often a subset of your overall credit limit.
The process involves filling out the check with the payee’s name and the desired amount, then signing it. Once deposited or cashed, the funds are charged to your credit card account as a cash advance. This transaction is treated differently than a regular credit card purchase. The borrowed amount, along with any applicable fees and interest, is added to your credit card balance.
When to Use Credit Card Checks
Credit card checks can be used when traditional credit card payments are not accepted. For instance, they might pay individuals or businesses that only accept checks or cash, such as a contractor or landlord. They can also be used to consolidate smaller debts, like paying off another credit card or a loan. Some individuals use these checks to obtain physical cash by writing the check to themselves and cashing it at a bank. While offering flexibility, their use is limited to circumstances where other payment methods are not feasible.
Key Considerations for Credit Card Checks
Using credit card checks involves several financial implications. Cash advance fees are almost always charged, typically ranging from 3% to 5% of the amount advanced, often with a minimum charge of $10. For example, a $1,000 check could incur a $30 to $50 fee upfront. Interest rates on credit card checks, treated as cash advances, are higher than the Annual Percentage Rate (APR) for regular purchases. Unlike purchases, cash advances do not have an interest-free grace period, meaning interest begins accruing immediately from the transaction date. This immediate accrual can make them a more expensive borrowing option if the balance is not repaid quickly.
The impact on your credit score is important. While a cash advance itself does not directly damage your score, it increases your credit utilization ratio. A higher utilization ratio, the amount of credit you are using compared to your total available credit, can negatively affect your credit score. Maintaining a high balance due to a cash advance could lead to a temporary dip in your score.
Security is an important consideration, as these physical checks carry risks similar to personal checks if lost or stolen. If blank checks fall into the wrong hands, they could be fraudulently used. Regarding repayment, credit card issuers are required to apply payments exceeding the minimum amount due to balances with the highest interest rates first. Since cash advances have higher interest rates, payments above the minimum are often applied to the cash advance balance first, which can help reduce the cost of the advance.