The holidays can be expensive, so when a creditor offers to let you skip a payment, it might sound like a good idea.
But these “payment holidays” will end up costing you more in the long run, and in ways you might not expect.
The promise vs. the reality
These promotions typically target peak spending times: the holidays, spring break and summer vacation season. The deal is alluring. Simply apply, pay a fee, and you’re off the hook for paying your car loan, personal loan or credit card that month.
Great! More money to buy presents for family and friends, right?
Except you still owe the money. You’re just agreeing to pay it later. Interest continues to accrue on your debt, in addition to the fee of $35 to $50. Any promise of extra cash in your pocket is disingenuous — you have more now only because you agree to pay more later.
- A skipped payment makes an installment loan one month longer — and a month’s interest more expensive. Say you have a three-year, $10,000 loan at a 13.7% annual percentage rate with monthly payments of $340 — a pretty typical loan term and cost for someone with average credit. If you skip one payment in the first December, the additional interest plus a $50 application fee will cost you upward of $130.
- With revolving debt like credit cards, you’re carrying your full balance forward and racking up interest on it. If your balance is $3,000 and your APR is 10.49%, skipping this month’s payment adds about $26 in interest to your balance. Plus you have to pay the application fee.
The greater your loan or card balance and the higher the interest rate, the worse a deal this is for you.
Another, hidden cost
Laura Scharr-Bykowsky, a certified financial planner in South Carolina, says these programs can entice people into unwise spending decisions.
“These plans are geared toward people who don’t have a lot of money and are stretched thin,” Scharr-Bykowsky says.
“The banks say, ‘You don’t have to make payments, so go spend more.’ So not only are you spending more on gifts,” she points out, “you’re going to end up spending more on the debt as well.”
“Holiday spending is purely discretionary,” Scharr-Bykowsky says. “You shouldn’t go further into debt for presents.” Rather than paying a fee only to accrue more interest and go deeper in the hole, she suggests taking an honest look at your finances.
Create and stick to a holiday budget so you know how much you can spend on gifts. If you find you have more family and friends than funds, Scharr-Bykowsky recommends going the DIY or craft route.
“Otherwise, a year from now when it’s the holidays again, you may still be paying the piper because you took this holiday,” she says.
If you’ve already gone overboard this holiday season, use your New Year’s resolution to make next year better. Put away a small amount each month — even $25 or $50 will add up over the year and give you breathing room to enjoy the season.
A previous version of this story misstated the carryover interest for a skipped credit card payment.