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 Significant Disadvantages to This So-called Gift
There is No Free Lunch - These offers typically have a very high acceptance rate. Popular belief is that it's 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 are 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. Let's say you owe $1000 at 1.5% per month (about 19.5% per year). Your monthly minimum payment is 2% (26.82% per year). If you pay the minimum for all 12 months of the year, 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 $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 $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 costs 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 to increase profit and 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 especially applicable in the business world, especially with credit card companies, which make money almost exclusively off interest.