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Avoid Payment Holidays When Offered

Once youíve been paying off a credit card for a while you might be offered a Ďpayment holiday.' Youíll get a letter stating that since the company knows itís difficult for some families around Christmas theyíre offering you a month off from paying as a Ďspecial present.' Why Would They Do That? Offers of payment holidays typically have a very high acceptance rate. People think itís great that they can take a month off from the stress of paying back debt. What they donít usually realize is that these Ďholidaysí arenít a present at all. Theyíre a great money-spinner for the credit card company. For the company itís 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 youíll find that the payment holiday isnít interest free! Youíre still being charged interest. And, since youíre 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 hereís an example. Letís 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 youíve 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. Thatís $217.80, and youíd owe $960.55 at the end of the year. Overall, youíve 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! Donít worry if you donít understand all the math. Itís been deliberately designed by mathematicians and marketers to be as confusing as possible, to stop you working out what a bad deal youíre getting. Just remember, donít fall for it. The more you owe the more that Ďholidayí will cost you. If It Sounds Too Good to Be True Anytime they offer you anything, itís because theyíre going to make a profit on it. If you canít see where their profit is coming from, be suspicious.


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