Avoid Payment Holidays When Offered
Once you’ve been paying off a credit card for a while you might be offered a ‘payment holiday.’ You’ll get a letter stating that since the company knows it’s difficult for some families around Christmas they’re offering you a month off from paying as a ‘special present.’
Why Would They Do That
Offers of payment holidays typically have a very high acceptance rate. People think it’s great that they can take a month off from the stress of paying back debt. What they don’t usually realize is that these ‘holidays’ aren’t a present at all. They’re a great money-spinner for the credit card company. For the company it’s a win-win situation. They get to make big profits just by making their poorer customers happy.
How Can Letting Me Off Paying Earn Them Money
So why should you avoid a payment holiday? If you read the small print you’ll find that the payment holiday isn’t interest free! You’re still being charged interest. And, since you’re not paying anything back that month the interest will be there next month for you to pay interest on – called compound interest.
This is interest paid on interest. That might feel a little hard to grasp, so here’s an example. Let’s say you were paying back $1000 of debt at 1.5% per month, about 19.5% per year. Your minimum payment each month is 2% or 26.82% per year.
If you pay the minimum for all 12 months of the year, then you will pay back $233.51 and 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.
With the payment holiday though, you pay 2% per month for only 11 months. So, you pay 24.3% back on the debt over the year. That’s $217.80, and you’d owe $960.55 at the end of the year. Overall, you’ve paid $37.86 for your payment holiday from a payment of about $20. 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 been deliberately designed by mathematicians and marketers to be as confusing as possible, to stop you working out what a bad deal you’re getting. Just remember, don’t fall for it. The more you owe the more that ‘holiday’ will cost you.
If It Sounds Too Good to Be True
Anytime they offer you anything, it’s because they’re going to make a profit on it. If you can’t see where their profit is coming from, be suspicious. As tempting as it might be, avoiding the payment holiday offered will be better for your bottom line.