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?
That's the trick. 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.
