Credit Card Convenience Checks: A Cautionary Tale

A credit card convenience check allows you to tap your credit card’s line of credit, and can seem like a godsend if money is tight and you need a short-term loan, or you need to consolidate debt. But there can be pitfalls that catch even the most careful cardholders unaware.

Our reader, whom we’ll call “David,” received an offer for no-transaction-fee convenience checks from his long-time card issuer. He made sure his balance was zero before writing a check for his full credit line of $15,500. He even called the issuer to be sure he could make the check out for that much and was assured he could. And so he did.

But now? “Now they’re reporting to Experian that I went over my credit limit because they added interest to my balance. That should have been disclosed… in the written offer or in the phone call,” he wrote when he contacted us. He felt that the person he talked with should have warned him that using his full credit limit would actually put him OVER his limit. He is careful with his credit and works hard to maintain an excellent credit score.

We talked to credit expert Barry Paperno, a former employee of FICO who blogs at Speaking of Credit, about how much this might hurt David’s credit. First, he has to understand that even if he wrote the check for slightly less, the effect on his credit would have been similar. “Fortunately, his score will only suffer via his utilization percentage, in which going over 100% (of the credit limit) is a little worse than being at 100%,” Paperno said. “And that will only be the case until he pays it down to the limit or lower.”

For those not familiar with the term “utilization,” he’s referring to the fact that most credit scoring models compare balances on revolving lines of credit to the credit limits. The higher this “debt usage” ratio, the greater the negative impact on your credit scores. FICO says that consumers with the best credit scores (here’s how to tell if you’re one of them) tend to use less than 10% of their available credit.

It’s important to understand that the debt usage ratio is based on information available at the time the credit score is requested, so if David pays down his debt, his scores can improve. “There’s no residual damage to the score for high utilization like there is with late payments, so once he pays it down it will be as if going over limit never happened,” Paperno explains.

But as far as not being aware that interest charges were coming and could potentially take David’s account over the limit? While it would have been nice if the person he talked with had pointed this out, it’s also the cardholder’s responsibility to know what’s in the cardholder agreement.

David did most things right. His excellent credit score — he told us his is above 800 — opens the door to some of the best credit card offers, like convenience checks without a transaction fee, or even no-interest, no-fee balance transfers. Cardholders with high credit scores are also often eligible for the best rewards credit cards, which are ideal for those who pay their balances in full each month. David also checks his scores (you can check your credit scores for free every month on Credit.com) and his credit reports, so he knows where he stands before he applies. (You can also get your free annual credit reports at AnnualCreditReport.com.)

But next time he comes across an offer like this, he’ll want to review his credit card agreement. Even though it is often tossed unread, it has some important information. It’s at least worth filing, and referring to before you use your credit card differently than you normally do. Forewarned can be forearmed.