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Best to skip most 'skip-a-payment' offers

Avoid them except in financial emergencies, experts say

By Steve Garmhausen

Offers by credit card issuers to skip a monthly payment can seem like a godsend, but if cardholders think such payment holidays are a free ride, they'd better think again.Best to skip most 'skip-a-payment' offers

"Most people don't really understand the full effect of skipping a payment," says Harrine Freeman, a Washington, D.C.-based credit repair counselor. These offers, which are typically extended by stores, banks and credit unions, seem almost like an act of kindness on the part of the credit card issuers. However, they can easily end up costing cardholders who take advantage of them more in the end.

Sure, there are instances in which it's almost impossible to ignore the temptation, as  an offer may hit your mailbox at the most opportune moment, such as when you've lost your job unexpectedly or your furnace exploded and that one-time reprieve seems almost a blessing. Unless your situation is truly dire, however, don't take the bait.

If at all possible, experts warn that it's best to leap past the temptation to skip a month. In essence, the lender is only allowing you to accrue more interest, says Robert Manning, research professor of consumer finance at the Rochester Institute of Technology.  Even if you didn't charge anything else on the card that month, you would still end up with a higher balance, with the accrued interest added in at the end of the month on what you already owed.

While credit card issuers have long allowed customers to request payment holidays, in the past decade or so, they have increasingly initiated the offers as a marketing tool, adds Jerry Coyne, chief operating officer of Alliance Cos., a Newton, Mass.-based consulting firm.  "These offers are far more common for credit cards than for other kinds of loans such as mortgages, largely because of legal restrictions." 

How skipping a payment can hurt you
Skip-a-payment programs have been around for decades and are lucrative for credit card issuers -- and expensive for you. Here's why:
• Interest still accrues on your balance, even when you skip a payment. This extra interest can actually extend the number of months it would take to pay off your balance (see box). The number of months can increase dramatically on a loan with a high rate, a high balance or both.
•  Some card issuers, particularly credit unions, allow cardholders to skip a payment for a month as a service to their members. Because cardholders typically initiate these arrangements, a fee or service charge is incurred. A typical fee is $25 to $35. This fee is then added to the account balance on top of the accrued interest for the skipped month, which again can add extra months to pay off the balance.

What skipping a payment really costs
Let's say you have a balance of $5,000 on your credit card at an 11.99 percent interest rate. You pay $100 each month. Skipping a payment of $100 would cost $199 because you'd extend your loan length and increase your interest costs.

The cost of skipping a payment
  Skipping a payment NOT skipping a payment
Balance $5,000 $4,900
Interest rate 11.99% 11.99%
Monthly payment $100 $100
Months until paid off 70 (5 years, 10 months) 68 (5 years, 8 months)
Total interest paid $1,964 $1,865
Total paid $6,964 $6,765
Under this scenario, skipping a single $100 payment lengthens the loan by two months and costs an extra $199. Use the CreditCards.com minimum payment calculator to run the numbers on your own situation.

Read the fine print
If you took advantage of a skip-a-payment offer and then noticed later that it seemed to be taking longer than expected to pay off the balance, part of the reason may be that the consequences of doing so were hidden in the fine print. The notification of any processing fees and the continuing interest accrual are often nested somewhere on the back of the offer.

Not everyone is qualified for a skip-a-month offer. To qualify for Bank of America's "payment holiday," for example, customers must meet have had the account open at least a year, be current on payments and under the credit limit, says Betty Riess, a Bank of America spokeswoman.

When not to skip a payment
Common sense can come in handy when considering skip-a-payment offers, says Gail Hillebrand, senior attorney with Consumers Union, the nonprofit organization that publishes Consumer Reports. "If you are going to be paying a fee that is close to the minimum payment, you'd be better off just making the minimum payment," she says.

Under no circumstances should you use a skip-payment offer to enable discretionary binges such as a day at the mall or a vacation, says Freeman. If you choose to skip a payment, don't take it as a license to buy a little something extra for yourself: That will just dig the hole deeper.

"Most people who take that option then charge something that month," says Freeman. If that's the case, you will end up with the new charges as well as the accrued interest on the old balance and a processing fee, if the card issuer charged a processing fee for the offer.

When to skip a payment
Freeman recommends taking your card issuer up on skip-a-month offers only during crises. If car repairs leave you short one month, for example, it might be better to skip a payment than to miss a payment. Missing a payment will result not only in a late fee that's likely to exceed any skip-a-month processing fee, but will damage your credit rating as well, says Hillebrand.

What to do after skipping a payment
If you're in a bind and a skip-a-month offer comes just in time, remember this: After skipping, get serious about paying more than the minimum payment in ensuing months. That will minimize the total interest you pay over the long run. Of course, paying more than the minimum is a great idea whether you've taken a month off or not, says Hillebrand. "Particularly in these economic times, people ought to be looking at whittling down their debt."

Published: February 21, 2008


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