14 Mar 2008 02:21:23 | Lee Asher
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'.
This can be a benefit when you have an unforeseen expense that
throws out your monthly income and expenditure balance. In some
cases if you are sufficiently in advance on your loan - you can
choose not to make your regular loan payment. You can, in
effect, have a payment "holiday".
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 Profits?
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
from 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.
About Author :
