subject: The Down Side of Credit Card Payment Holidays [print this page] With tighter budgets and heavier financial burdens, especially around the holidays, credit card companies have come up with an offer that they say will lighten the burden. They're often called 'payment holidays' and have a high acceptance rate by consumers. But, 'buyers beware!' (Keep in mind that credit card companies are in the business of making money and not saving you money.) Be suspicious of any offer that sounds too good to be true. The typical holiday payment offer includes a message of sympathy for the financial burdens of the season and a 'kind' gift for you to skip a monthly payment on your credit card balance. Most of us consider a gift as something free but this is not the case. The offer is genuine but its not free--it will cost you! The fine print will explain that your payment holiday is not interest free. You will continue to be charged interest on the balance during the period you are taking your 'payment holiday.' And since youre not making a payment, youll find that the following month you will be paying interest on that interest (compounded interest!). In fact, while you get a small break from making your credit payment, the interest will actually increase your outstanding balance. Another problem with taking a 'payment holiday' is that youre more likely to spend more than you would have otherwise. There's something about having that break that invites a bit of the free spirit in us to celebrate and possibly be a bit careless with our purchasing power. So what started out as a big break may actually backfire. If you calculate 12 months of minimum monthly payments of 2% of the balance on a debt of $1,000, the annual payment on the debt would be $233.51 which would leave a debt of $941.62 remaining. Now . . . if you take that same $1,000 debt and pay only 11 months of minimum payments, you would have paid $217.80 and owe $960.55 at the end of one year. Although the difference seems small, you need to consider that you have not only lost out on a payment to lower your debt but have lost nearly $18 in interest. The mathematics seem to be deliberately designed to be confusing. But no matter--the more debt you have on the account the more a payment holiday will cost you.
