How to Use Credit Card Checks to Your Advantage

Yes, credit cards (if used wisely) can be your friends.

If you have any credit cards, you have probably been the recipient of numerous checks that can be used to draw money from your card account. I have seen many articles advising to shred these immediately and take steps to stop your creditors from sending them. If you have a debt problem, then this is sound advice. But I have found ways to use these checks in ways that are beneficial and even profitable if used correctly.

Step 1

Credit card checks come in three distinct types so I will address each one separately. The first type is the 'cash advance' check. This type of check, when cashed, is subject to the cash advance terms of your credit agreement which usually means a transaction fee of at least 3% and a higher interest rate than normal purchases. These checks should be avoided like the plague. Shred them immediately. Use them for kindling in your fireplace. Destroy them in whatever manner you choose but do NOT under any circumstances cash them or throw them away intact. In my book, there is no situation dire enough to use one of these paper loan sharks. Any time you incur debt at such a high cost, it will start you spiraling down into a debt crisis and make your situation worse in the long run. If you need emergency money from your credit card hopefully you have access to one of the other types of credit card checks:

Step 2

The second type of credit card check is the 'balance transfer' check. These checks also usually carry an up-front fee of 3%, but the interest rate charged on the balance is most often considerably lower than your normal purchase rate. These checks are meant to be used for paying off debt in another account that is charging a higher interest rate. But because they are in the form of a check, they are much more versatile than a regular balance transfer. If you call your credit card company asking for a balance transfer, you are generally restricted to paying another creditor and not another account with the same company. They will sometimes send the money directly to your bank account, but that is rare. But with a check, you can simply deposit it into your bank account and use it however you wish. Not only can you pay another account with the same company, you can even pay the same account you drew the money out of! I once had a credit card account that I was paying a high rate on when they sent me some balance transfer checks. I then used my entire paycheck to pay down this card even though I needed some of that money for other bills. As soon as my available credit was freed up on the card, I deposited one of the checks for the same amount I had paid to the card. My net result was that I had the same amount of money in my bank account as when I first got paid, my monthly payment to that card was already fulfilled with no net expense to my checking account, and my interest rate on the card was now substantially lower. Yes, I had the added expense of the 3% fee on my card, but that more than paid for itself in the cheaper interest charges going forward. These checks are also the best way to get emergency cash if you are faced with a situation where you have no other choice but to borrow money and do not intend to pay it off in just one month. I recently faced a situation where I had to replace my car and had to borrow to do it. Rather than getting an auto-loan which would have required me to increase my insurance coverage and forced me to buy from a dealer, I used a balance transfer check to get a low interest loan and bought a used car from a friend that I trust. Now, I don't advocate going into debt recklessly, but in a pinch, these checks are much more affordable than the afore mentioned 'cash advance' checks.

Step 3

The third type of credit card check I have encountered is actually my favorite. It is the 'purchase check'. These checks allow you to draw money from your credit card under the same terms as your regular purchases. In other words there is no up-front fee and the interest rate is the same as if you used your card in a store. These checks are especially good for people who pay off their balances in full each month and so do not pay any interest. It is a good way to get some quick cash for transactions that do not take credit cards because you don't have the 3% fee. Of course if you don't pay in full on the first bill, you will pay interest on that money. But if you time your transaction so that it is just after your billing date, you will have almost a month before you get billed and another 3 weeks or so after that to pay so you will have gotten a loan for almost 2 months for free. But the really fun thing about these checks is that you can do this continuously and extend this free loan indefinitely as long as you write the check for no more than half your credit line and your credit card company keeps sending you the checks. This is how I have used these checks in the past: I wrote the check for half of my credit line and deposited the money into an interest earning savings account. When the first bill came I wrote another purchase check for the same amount minus $100.00 and deposited it into my checking account. I then paid the credit card in full using the money from the 2nd check plus $100.00 of my own money. I continued in this fashion every month until the debt was paid in full while earning interest on the entire amount for the entire time. In the end I had accumulated considerably more interest in my savings account than I would have if I had simply deposited $100.00 per month. But if you try this, make sure the savings account you use has full liquidity and not a CD or any other account that has a penalty fee for early withdrawal. This in necessary because if the credit card company does not send you another purchase check in any given month, you might need that money to pay them and avoid their interest charges. But even if that happens you will have still accumulated some interest in your savings account with THEIR money.

Tip

Make sure you know what type of check you are dealing with before cashing it. Knowing all the terms is the only way to determine if you can afford this particular type of debt. If you are not going to use a check you receive from your credit card company, do not simply throw it away. Shred it or destroy it in some other secure fashion. Crooks will go through your trash and use anything they can find to profit at your expense. Unused checks of any kind are among the easiest things they can find in your trash and use themselves. And this is not just limited to someone rummaging around in your trash can on the street outside your house on garbage night. It might already be in a land fill somewhere when a crook finds it. So make sure you shred!

Warning

Never accumulate debt recklessly. If you cannot afford to pay your cards in full every month make sure you consider all the costs involved before borrowing at all. It is better to go without than to pay more every month for something that was not absolutely necessary in the first place. Make sure you read the fine print! Sometimes credit card companies will hide hidden fees or other expenses. I used a balance transfer check once with an excellent interest rate plus the usual 3% fee only to find out that the fee itself incurred interest at the much higher purchase rate. I called the credit card company to complain, but they would not change it so I closed the account.