8th January 2006

Credit Card Payment Holidays - Blessing Or Curse?
 by: Kevin Erickson

If you have a credit card (most Americans have over 10) then you've probably received an offer called a "payment holiday". You'll receive a letter that says something to the effect, "That because XYZ Credit Card Company understands how difficult it is for some families around this time of year to make ends meet (or whatever other excuse they can come up with) that you are being given the opportunity to take a month off from making your monthly payment as a 'special gift' and thank you for being such 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 individuals feel it's a wonderful thing to be able to take a month off from the stress of having to make another payment. However, what they don't usually realize is that these so-called "holidays" really aren't a gift at all. They are simply are way to increase profits for the credit card companies.

It's a Win-Win For the Credit Card Companies

Hmm... So how can letting me skip a payment earn them more money? Well, here's where the slight of hand comes in. If you read the small print in any credit card agreement you'll quickly realize that the payment holiday isn't interest free. You are still being charged interest and because you're not paying anything back for a particular month that interest will be there next month for you to pay compounded interest on or interest upon interest.

Here's an example that hopefully with help clarify the principal I'm trying to convey. Let's say you were paying back $1000 of debt at 1.5% per 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 paid back $233.51 and you would still owe $941.62 at the end of the year. Your debt has 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 month for only 11 months or (24.3% on your debt) or $217.80 and you would still owe $960.55 at the end of the year. You end up paying about $38 for the privilege of not making a single payment of about $20 (2% of $1,000). In other words, your month off cost you almost two months of payments.

Don't worry if you don't understand all the math - it's suppose to be confusing. In fact, it was specially designed by mathematicians and marketers to be as confusing as possible to keep you from being able to figure out what a bad deal you're getting. Case in point, if you hadn't read this article would you have thought twice about turning down the next "payment holiday" offer you receive? And remember... don't fall for it because the more you owe, the more that "holiday" will cost you. Instead, you should consider 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 applies here and remember that no-one ever gives away anything of value for free, that is with no strings attached - especially the credit card companies. Anytime they offer you anything, it's because they are going to make a profit and if you can't see how they benefit, be suspicious because it's probably just the next slight of hand trick to come down the pipe that is being used to quietly milk you out of a little more interest.

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Tips and Advice for Getting Out of Debt

Being in debt can seem overwhelming. Spiralling interest costs and repayment demands only serve to increase the feeling of being swamped. But there are practical steps you can take to help you get out of debt:

Don't Bury Your Head in the Sand!
1. Make a complete list of all debts.
2. Work out a budget to see if you have any money left over for repayments.
3. Don't ignore repayment demands. Contact your creditors and explain your situation.
4. Do not borrow more money to repay existing debts. Consider ways of earning extra cash instead.

Prioritise Your Debts
Which debts you pay first should depend on the severity of action the creditor could take against you. Priority debts include mortgage arrears, rent arrears, council tax and fines. Lower priority debts include credit and store card arrears, bank overdrafts and hire purchase.

Switch to Get a Better Rate
With credit cards, mortgages and loans, check if you can switch and save. The bigger the debt, the bigger the likely benefit: remortgaging can save thousands of pounds.

Negotiating With Creditors
1. Explain clearly what you can pay and how often, and if you have priority debts that come first.
2. Be realistic about what you can afford. 'Token' offers as low as £1 a week may be acceptable.
3. Creditors may challenge your offer. Be prepared to provide proof of income and expenditure such as bills.
4. If creditors do not respond, start paying what you can afford anyway and seek help.

Where to Get Advice
Citizens Advice Bureaux offers help and arranges free legal advice.

The National Debtline gives free help and an information pack. For Wales and England, call 0808 808 4000. In Scotland, it's 0141 572 9273.

Debt Management Companies
You can consolidate debts and make just one payment a month. But the debt will then normally take longer to clear and cost more overall. Debt management companies deal with creditors on your behalf, drafting letters, etc. However this may also mean some loss of control. Many of these firms charge a monthly administration fee leaving you with less money to pay off your debts.

Sunday 3rd July 2005

Last week, a security exploit at CardSystems Solutions, Inc, a credit card processor, may have allowed thieves to obtain as many as 40 million credit card numbers from unsuspecting victims. The theft was brought about though a virus introduced into the CardSystems that allowed external hackers to obtain access to the account information. Adding to the problem was the fact that CardSystems wasn’t supposed to have the account information at all. It appears that CardSystems “inappropriately” held onto the information after clearing the credit card transactions. At that point, the account information should have been deleted. CardSystems held onto the account information for supposed “research purposes.” Fortunately for those involved, the compromised information only included account numbers and not Social Security numbers, which would have assisted the thieves in identity theft scams. This latest security breach at a credit card processor outlines how anyone can be vulnerable to account or even identity theft. Is there anything that can be done about it?

The credit card companies largely dictate the relationships between the credit card companies and the credit card processors. They are supposed to keep tabs on the processors and make sure that the processors use secure measures to protect the data of customers. These issues are not governed by law, but the processors can be fined by the credit card companies for violations. So what can the average credit card customer do to make sure that their account information isn’t compromised? Not much, it would appear. The paper transaction has long since been replaced almost universally by the electronic one, and anytime a customer uses a credit card, their account information is moved from one computer to another. Hackers continue to develop more sophisticated methods of stealing information, and their techniques are often ahead of the processing companies’ ability to develop comparable security measures. For the foreseeable future, credit card customers must consider that their accounts are vulnerable.

In time, the credit card companies and their associated processors will establish security guidelines that are more effective than the ones that are currently in place. In the meantime, the best thing cardholders can do is to simply minimize their exposure. The best way to do this is to have as few credit card accounts as possible and to use them sparingly. Granted, it is often difficult to avoid using credit cards, but there are times when people simply pull them out of the wallet out of habit when using a check or cash would suffice. This may sound inconvenient, but at the moment, the only way to make certain that your account numbers are safe is to avoid using them when possible.

©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including End-Your-Debt.com, a site devoted to debt consolidation and credit counseling, and HomeEquityHelp.com, a site devoted to information regarding home equity loans.