Payment Holidays - Avoid Them Like The Plague
Payment Holidays - Avoid Them Like The PlagueAfter you’ve been paying off your credit card for a time, you might occasionally be offered a ‘payment holiday’. Usually 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’ or 'payment vacation'. Now Ask Yourself Why Would They Want To Do That? Payment holiday offers typically have a very high acceptance rate. Most people think it’s great that they can take a month off from the stress of paying back debt, they tend to feel "worthy" of special treatment. What they don’t usually realize is that these ‘holidays’ aren’t really a present at all – they’re a big money-maker 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 Your 'Holiday From Paying' Earn Them Money? Well, that’s where the trickiness 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 (even on your 'holiday!) – and since you’re not paying anything back that month, the interest will be there next month for you to pay more interest on (compound interest, you see). That might seem a little hard to grasp, so let's look at 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 just 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, but 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 fabulous payment holiday from a payment of about $20. In other words, your "special deal"month off cost you almost two months of payments. If you don’t understand all the math involved here, don't feel alone, it’s been deliberately designed by mathematicians and marketers to be as confusing as possible, to stop you working out what the really 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 their special offer.
The more you owe, the more that ‘holiday’ will cost you. Wouldn’t it be better to take your money and go on a real holiday, instead of spending it all on repaying credit card debt? You Heard It Before - If It Sounds Too Good to Be True… In all things in life, remember that no-one gives you something 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, count on it. If you can’t see where their profit is coming from, be leery – it’s most likely all a big scam that’s going to cost you even more money, though you may not realize it yet.
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