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Always Avoid Payment Holidays
Once you've been paying off a credit card for a while, you
might be offered a 'payment holiday'. You'll get a letter, saying
that since the company knows it's difficult for some families
around Christmas (or whatever other excuse they think up),
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 realise 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?
Well, that's where the trick comes in. 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 (compound interest, you
see).
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%
(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 maths involved
here - 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. After all, if you haven't read
this, would you really ever turn down a month off paying your
bills? Just remember: don't fall for it. The more you owe, the
more that 'holiday' will cost you. Wouldn't you rather take your
money and go on a real holiday, instead of spending it all on
repaying credit card debt?
If It Sounds Too Good to Be True?
In all things in life, remember that no-one gives you anything
for nothing - least of all credit card companies. 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 - it's probably all a big scam that's going to cost
you money, even if you don't realise it.
Ken Austin is the webmaster at Debt Consolidation
Information and Credit Card Debt
Relief
MORE RESOURCES:
Credit - Google News
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