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Credit Card Payment Holidays - Blessing Or Curse?
If you have a credit card (most Americans have over 10) then
you've probably received an offer called a "payment holiday".
You'll receive a letter that says something to the effect, "That
because XYZ Credit Card Company understands how difficult it is
for some families around this time of year to make ends meet (or
whatever other excuse they can come up with) that you are being
given the opportunity to take a month off from making your
monthly payment as a 'special gift' and thank you for being such
a valuable customer."
Sounds Good on the Surface but Why Are They Doing It? Typically,
payment holiday offers have a high acceptance rate. A high
percentage of individuals feel it's a wonderful thing to be able
to take a month off from the stress of having to make another
payment. However, what they don't usually realize is that these
so-called "holidays" really aren't a gift at all. They are
simply are way to increase profits for the credit card companies.
It's a Win-Win For the Credit Card Companies Hmm... So how can
letting me skip a payment earn them more money? Well, here's
where the slight of hand comes in. If you read the small print
in any credit card agreement you'll quickly realize that the
payment holiday isn't interest free. You are still being charged
interest and because you're not paying anything back for a
particular month that interest will be there next month for you
to pay compounded interest on or interest upon interest.
Here's an example that hopefully with help clarify the principal
I'm trying to convey. Let's say you were paying back $1000 of
debt at 1.5% per month (or about 19.5% per year) with a minimum
payment each month of 2% (or about 26.82% per year).
If you made the minimum payment for all 12 months, you would
have paid back $233.51 and you would still 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.
However, if you were to take a payment holiday you would pay 2%
per month for only 11 months or (24.3% on your debt) or $217.80
and you would still owe $960.55 at the end of the year. You end
up paying about $38 for the privilege of not making a single
payment of about $20 (2% of $1,000). 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 suppose
to be confusing. In fact, it was specially designed by
mathematicians and marketers to be as confusing as possible to
keep you from being able to figure out what a bad deal you're
getting. Case in point, if you hadn't read this article would
you have thought twice about turning down the next "payment
holiday" offer you receive? And remember... don't fall for it
because the more you owe, the more that "holiday" will cost you.
Instead, you should consider doing everything you can to pay off
all your debt as quickly as possible.
If It Sounds Too Good The old saying, "if it sounds to good to
be true then it probably is" certainly applies here and remember
that no-one ever gives away anything of value for free, that is
with no strings attached - especially the credit card companies.
Anytime they offer you anything, it's because they are going to
make a profit and if you can't see how they benefit, be
suspicious because it's probably just the next slight of hand
trick to come down the pipe that is being used to quietly milk
you out of a little more interest.
This article may be reproduced only in its entirety
About the author:
Kevin Erickson is a contributing writer to: Debt Management | Credit Card Debt | Consolidate Debt
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