Always Avoid Payment Holidays
Once youíve been paying off a credit card for a while, you might be offered a Ďpayment holidayí. Youíll get a letter, saying that since the company knows itís difficult for some families around Christmas (or whatever other excuse they think up), theyíre offering you a month off from paying, as a ĎSpecial Presentí.
Why Would They Do That?
Offers of payment holidays typically have a very high acceptance rate.
People think itís great that they can take a month off from the stress of paying back debt. What they donít usually realize is that these Ďholidaysí arenít a present at all - theyíre a great money-spinner for the credit card company.
For the company, itís 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, thatís where the trick comes in.
If you read the small print, youíll find that the payment holiday isnít interest free!
Youíre still being charged interest - and since youíre 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 hereís an example.
Letís say you were paying back $1,000 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 youíve 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). Thatís $217.80, and youíd owe $960.55 at the end of the year. Overall, youíve 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.
Donít worry if you donít understand all the math's involved here - itís been deliberately designed by mathematicians and marketers to be as confusing as possible, to stop you working out what a bad deal youíre getting.
After all, if you havenít read this, would you really ever turn down a month off paying your bills?
Just remember: donít fall for it.
The more you owe, the more that Ďholidayí will cost you. Wouldnít 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 TrueÖ
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, itís because theyíre going to make a profit on it.
If you canít see where their profit is coming from, be suspicious - itís probably all a big scam thatís going to cost you money, even if you donít realize it.
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