Friday, August 31, 2007
Credit Card Payment Holidays - Blessing or Curse?
If you have got got a credit card (most Americans have over 10) then you've probably received an offer called a "payment holiday". You'll have got a missive that states something to the effect, "That because XYZ Credit Card Company understands how hard it is for some households around this clip of twelvemonth to do ends ran into (or whatever other alibi they can come up up with) that you are being given the chance to take a calendar month off from making your monthly payment as a 'special gift' and give thanks you for being such as 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 people experience it's a fantastic thing to be able to take a calendar month off from the emphasis of having to do another payment. However, what they don't usually recognize is that these so-called "holidays" really aren't a gift at all. They are simply are manner to increase net income for the credit card companies.
It's a Win-Win For the Credit Card Companies
Hmm... So how can letting me jump a payment earn them more than money? Well, here's where the flimsy of manus come ups in. If you read the small black and white in any credit card understanding you'll quickly recognize that the payment holiday isn't interest free. You are still being charged interest and because you're not paying anything back for a peculiar calendar calendar month that interest will be there adjacent month for you to pay compounded interest on or interest upon interest.
Here's an illustration that hopefully with aid clear up the principal I'm trying to convey. Let's say you were paying back $1000 of debt at 1.5% per calendar calendar 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 got paid back $233.51 and you would still owe $941.62 at the end of the year. Your debt have 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 calendar month for lone 11 calendar months or (24.3% on your debt) or $217.80 and you would still owe $960.55 at the end of the year. You stop up paying about $38 for the privilege of not making a single payment of about $20 (2% of $1,000). In other words, your calendar month off cost you almost two calendar months of payments.
Don't worry if you don't understand all the mathematics - it's say to be confusing. In fact, it was specially designed by mathematicians and marketers to be as confusing as possible to maintain you from being able to calculate out what a bad deal you're getting. Lawsuit in point, if you hadn't read this article would you have got thought twice about turning down the adjacent "payment holiday" offer you receive? And remember... don't fall for it because the more than than you owe, the more that "holiday" will cost you. Instead, you should see 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 uses here and retrieve that no-one ever gives away anything of value for free, that is with no twines attached - especially the credit card companies. Anytime they offer you anything, it's because they are going to do a net income and if you can't see how they benefit, be leery because it's probably just the adjacent flimsy of manus fast one to come up down the tobacco pipe that is being used to quietly milk you out of a small more than interest.
This article may be reproduced only in its entirety.