After a while of paying off a credit card, you may be given a "payment holiday." You'll get a letter saying that, as a "special gift," you won't have to pay for a month because the company knows that Christmas can be hard for some families.
What were they thinking?
Most people take up offers of time off from making payments. People think it's great that they can stop worrying about paying back debt for a month. What they don't know...
After a while of paying off a credit card, you may be given a "payment holiday." You'll get a letter saying that, as a "special gift," you won't have to pay for a month because the company knows that Christmas can be hard for some families.
What were they thinking?
Most people take up offers of time off from making payments. People think it's great that they can stop worrying about paying back debt for a month. Most of the time, they don't realise that these "holidays" aren't really gifts at all. They're a great way for the credit card company to make money. It works out well for the business. They make a lot of money just by making their customers who are poor happy.
How can they make money by not making me pay?
That's how it works. If you read the fine print, you'll see that the payment holiday doesn't mean you don't have to pay interest. Interest is still being added to your loan. And since you don't pay anything back that month, the interest will still be there for you to pay interest on the next month. This is called compound interest.
This is interest on interest. This might be hard to understand, so let's look at an example. Let's say you had a $1000 debt that you were paying back at 1.5 percent per month, or about 19.5 percent per year. Your minimum monthly payment is 2 percent, which is equivalent to 26.82 percent a year.
If you only pay the minimum for the whole year, you will pay back $233.51 and owe $941.62 at the end. Your debt is now $58.38 less, but you've spent $175.13 on interest.
With the payment holiday, you only have to pay 2 percent per month for 11 months instead of 12. So, you pay back the debt at a rate of 24.3% per year. That's $217.80, and at the end of the year, you'd owe $960.55. You've paid a total of $37.86 for your payment holiday, which started with a payment of about $20. In other words, your month off cost you almost two months' worth of payments!
Don't stress out if you don't get all the math. Mathematicians and marketers have made it as hard to understand as possible on purpose so you can't figure out what a bad deal you're getting. Just remember not to let it fool you. The more you owe, the more expensive that "vacation" will be.
If it sounds too good to be true, it probably is.
Every time they give you something, it's because they'll make money from it. If you can't see where they're making money, you should be wary.
