Credit Card Payment Holidays - Blessing Or Curse?
If you have a credit card (most Americans have over 10) then you've probably received an offer called a "payment holiday". You'll receive a letter that says something to the effect, "That because XYZ Credit Card Company understands how difficult it is for some families around this time of year to make ends meet (or whatever other excuse they can come up with) that you are being given the opportunity to take a month off from making your monthly payment as a 'special gift' and thank you for being such a valuable customer."
Sounds Good on the Surface but Why Are They Doing It?
Typically, payment holiday offers have a high acceptance rate. A high percentage of individuals feel it's a wonderful thing to be able to take a month off from the stress of having to make another payment. However, what they don't usually realize is that these so-called "holidays" really aren't a gift at all. They are simply are way to increase profits for the credit card companies.
It's a Win-Win For the Credit Card Companies
Hmm... So how can letting me skip a payment earn them more money? Well, here's where the slight of hand comes in. If you read the small print in any credit card agreement you'll quickly realize that the payment holiday isn't interest free. You are still being charged interest and because you're not paying anything back for a particular month that interest will be there next month for you to pay compounded interest on or interest upon interest.
Here's an example that hopefully with help clarify the principal I'm trying to convey. Let's say you were paying back $1000 of debt at 1.5% per month (or about 19.5% per year) with a minimum payment each month of 2% (or about 26.82% per year).
If you made the minimum payment for all 12 months, you would have paid back $233.51 and you would still owe $941.62 at the end of the year. Your debt has been reduced by $58.38 and you've lost $175.13 in interest.
However, if you were to take a payment holiday you would pay 2% per month for only 11 months or (24.3% on your debt) or $217.80 and you would still owe $960.55 at the end of the year. You end up paying about $38 for the privilege of not making a single payment of about $20 (2% of $1,000). In other words, your month off cost you almost two months of payments.
Don't worry if you don't understand all the math - it's suppose to be confusing. In fact, it was specially designed by mathematicians and marketers to be as confusing as possible to keep you from being able to figure out what a bad deal you're getting. Case in point, if you hadn't read this article would you have thought twice about turning down the next "payment holiday" offer you receive? And remember... don't fall for it because the more you owe, the more that "holiday" will cost you. Instead, you should consider doing everything you can to pay off all your debt as quickly as possible.
If It Sounds Too Good
The old saying, "if it sounds to good to be true then it probably is" certainly applies here and remember that no-one ever gives away anything of value for free, that is with no strings attached - especially the credit card companies. Anytime they offer you anything, it's because they are going to make a profit and if you can't see how they benefit, be suspicious because it's probably just the next slight of hand trick to come down the pipe that is being used to quietly milk you out of a little more interest.
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About the Author: Kevin Erickson is a contributing writer to: Debt Management | Credit Card Debt | Consolidate Debt