Debt Consolidation

Once youve been paying off a credit card for a while you might be offered a ˜payment holiday.' Youll get a letter stating that since the company knows its difficult for some families around Christmas theyre offering you a month off from paying as a ˜special present.'

Why Would They Do That?

Offers of payment holidays typically have a very high acceptance rate. People think its great that they can take a month off from the stress of paying back debt. What they dont usually realize is that these ˜holidays arent a present at all. Theyre a great money-spinner for the credit card company. For the company its a win-win situation. They get to make big profits just by making their poorer customers happy.

How Can Letting Me Off Paying Earn Them Money?

That's the trick. If you read the small print youll find that the payment holiday isnt interest free! Youre still being charged interest. And, since youre not paying anything back that month the interest will be there next month for you to pay interest on - called compound interest.

This is interest paid on interest. That might feel a little hard to grasp, so heres an example. Lets say you were paying back $1000 of debt at 1.5% per month, about 19.5% per year. Your minimum payment each month is 2% or 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 been reduced by $58.38 and youve lost $175.13 in interest.

With the payment holiday though, you pay 2% per month for only 11 months. So, you pay 24.3% back on the debt over the year. Thats $217.80, and youd owe $960.55 at the end of the year. Overall, youve 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!

Dont worry if you dont understand all the math. Its been deliberately designed by mathematicians and marketers to be as confusing as possible, to stop you working out what a bad deal youre getting. Just remember, dont fall for it. The more you owe the more that ˜holiday will cost you.

If It Sounds Too Good to Be True

Anytime they offer you anything, its because theyre going to make a profit on it. If you cant see where their profit is coming from, be suspicious.

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