Payment Holidays - Why They Work Against You. After having a credit card for a while you might receive an offer for a so called "payment holiday," which allows you a month off from paying your credit bills.
They do this, they say, because they understand that money can be tight during the holidays, especially Thanksgiving and Christmas, but the truth is not so rosy.
There Are major Disadvantages to This So-called Gift
There is No Free Lunch
These offers typically have a very high acceptance rate. Popular belief is that its great to be able to take a month off from the stress of paying back debt.
However, in this instance, popular wisdom is misguided. Payment holidays turn out to be a great money-spinner for the credit card company.
For these companies, it's a win-win situation: they get to make big profits and make their poorer customers happy at the same time.
Can They Make Money by Allowing You to Not Pay?
Yes they can! The key to profit for these companies is that the payment holiday isn't interest free! You're still being charged interest, and since you're not paying anything back that month, both that interest and the interest on that interest will be waiting when you return from your ‘"holiday".
That might be a little confusing, so here's an example. Lets say you owe $1000 at 1.5% per month (about 19.5% per year). Your minimum payment each month is 2% (26.82% per year). If you 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 only been reduced by $58.38, and you've lost a full $175.13 in interest.
However, the scheduled missed payment means you pay 2% per month for only 11 months (so you pay 24.3% back on the debt over the year). This totals at $217.80, and you'd owe $960.55 at the end of the year. Overall, you've paid $37.86 for your payment holiday from a payment of about $20. In other words, your month off cost you almost two months of payments.
If this math sounds confusing, don't worry, it's meant to be. It's been deliberately designed by mathematicians and marketers to be as confusing as possible, both to increase profit and to stop you from working out what a bad deal you're getting. After all, would you have ever turned down a ‘"deal" like this if you hadn't learned about it here? And understand that the more you owe, the more that ‘"holiday" will cost you.
Remember - If It Sounds Too Good to Be True It Probably Is This saying is one which is especially applicable in the business world, and most of all with credit card companies, which make money almost exclusively off interest. If it seems that the company has no way to make a profit on an offer, then they probably haven't shown you the whole story.