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The One Holiday You Don’t Want To Take
March 13th, 2005 by Mike Hillyer
Filed under: Credit Cards

I personally consider Credit Card companies to be as evil as banks, and maybe even a little more evil. One example is that I applied once for a credit card, only to be turned down. I applied to the same company a short while later since they offered a free t-shirt for applying (boy was I dumb, don't apply based on the free stuff, it's only a few bucks at a discount store anyway), but this time I wrote that I was a student instead of being part-time employed as I did the last time. What do you know, I was approved this time! Credit card companies seem to like to prey on university students, letting them amass debt while in school so they can pay it off when they get their real jobs.

You wanna read something scary?

The research also revealed that average credit card debt among students rose from $1,879 to $2,748 between 1998 and 2000. The study showed that nearly one in four students with credit card debt owe more than $3,000 and that nearly 10% of students owe more than $7,000, down slightly from 1998. The study, which analyzed the credit card behavior of Nellie Mae student loan applicants last year, also found the percentage of students with credit cards rose from 67% in 1998 to 78% in 2000; the average number of credit cards per student fell from 3.5 cards to three cards in two years; the percentage of students with four or more credit cards rose from 27% in 1998 to 32% in 2000; and the percentage of graduate students with credit cards remained unchanged for the past two years at 95%.

Source: http://www.cardweb.com/cardtrak/news/2001/february/16a.html

That was back in 2001, and I doubt things are getting better.

I still have that credit card debt, though the card itself is cut up and the account canceled. The funny thing that I have noticed is that now that I have been making efforts to speed up the repayment of the card, I have more and more often noticed that my credit card statements have offered me a 'Payment Holiday'.

Trust me, that is one holiday you do not want to take. These payment holidays are often offered as you pay down your card, and during the holiday shopping season. You may even get a note from the card company making it sound like they are doing you some kind of favor, but I promise you they are not. Credit card companies want you to spend your card to the limit and make regular payments. They set your minimum payment as low as possible so that when making the minimum payments you will take years to get out of debt.

While cards issued by banks do not seem as bad about this, one card I have, issued by a company that deals only in offering credit cards, sets a minimum payment that would only see me paying down $10 of principal a month. At their set rate it would take me twenty six years to pay them off in full. By comparison, my wife's card was issued by a major bank and charges a minimum payment of roughly double the interest charged each month. If we stuck to the minimum payment on her card, we would have a balance that is 1.5X as big as my card paid off in three years.

Now what happens when I take that payment holiday? I may have a few extra dollars in my bank account, but the repayment of my credit card debt is set back by not one month, but 5 months. The interest that accumulates unchecked by a payment now has to be paid off at the slow rate of $10 in principal a month.

My advice is to never think a credit card company is doing you a favor. Don't use payment holidays and be wary when they offer you credit limit increases. If you have enough available for anticipated purchases, why do you need more?

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13 Comments so far
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Looking even beyond just the credit card companies, *no* company that “lends” you money is doing you a favor. That’s like saying the car salesman is doing you a favor by letting you buy a car.

The fact of the matter is that when you get a home loan, a credit card, a personal loan, or charge to an installment account, *you* are the customer.

People need to realize that: When you take out this kind of loan, you are buying money. You are the customer and the lender is the one who is selling you the money in order to make a profit. No lender does anyone a favor, even if it feels like that’s what’s happening. Just like with the car salesman, the idea is to make it *feel* like it’s a favor. But in reality, the profits are theirs. They do those things necessary to maximize their profits and minimize their losses, just like any other business.

Would you pay $100 in cash for $20 worth of groceries? If you put it on a card, that’s possibly what you’re doing, unless you pay your full balances within one or two months.

It used to be that credit cards were held and used for emergencies. Now people use them like they’re free money, without thinking. That’s too bad, because unless you happen to have a very astute credit mind and the ability to pay off everything you charge within the grace period, you’re borrowing from sharks.

I know two young guys, about 20 to 22 years old, both of whom got credit cards and immediately ran them up buying fancy new computer equipment. One of them talked to me about it before he did it, and I advised him against it, but he did it anyhow. The other acted on his own without advice. Now they’re both listening, after realizing how big a deal it is. I explained to both that it would take 30 years (or more with the high rates their cards had) to pay off a computer that would be outdated in one or two years if they made minimum payments. I told them about the virtues of saving and having cash on hand.

Credit cards are evil for most things, but they can be a blessing for a few things: Purchase protection for big-ticket items is nice to have, and rental car coverage is a good benefit if you travel. But some of the check cards with a logo of the major companies on it will give you similar benefits.

Which brings me to my final point: If you like using credit cards just because they are convenient and because you can use them to buy things online, you’re probably using the wrong kind of card. Shop around for a ATM/Debit/Check/Visa-or-MasterCard type of card, and make sure you get one from a bank that offers the features you want.

Finally - a reminder: Whether it’s a credit-card loan or another kind, the APR of the loan is what determines how much you are paying for the money you are buying from the lender. Yes - I said *you are buying* money from a lender, and how much you pay depends on how long it takes you to pay it off. It’s as simple as that. Credit cards are a big-money business for lenders and are a big-loss pig of a deal for borrowers.

If you have to borrow, like for a car or home purchase, you should always shop for money the same way (or more diligently than) you shop for gas, cars, clothes, airline tickets, electronics, homes and whatnot. No lender is ever doing you a favor - they are selling you money, and they are doing so at a profit. Don’t ever forget that.

Comment by Greg Hughes 03.20.05 @ 5:18 pm

The Wealthy Blogger - A new weblog that made me think (and write)

Trackback by greg hughes - dot - net 03.21.05 @ 9:57 am

Excellent advice Greg, thanks for posting it! The Check cards never caught on in (Western) Canada, because we have a great network for debit cards. These cards use the Interac network and not the credit card network, so in my case I still need a traditional credit card. That being said, you are right about using a check card, when available they are a great alternative to a traditional credit card.

Comment by Mike Hillyer 03.21.05 @ 5:05 pm

A check card is what I’ve used for roughly the last year: convenience of a credit card without the risk.

The problem is that now we’re wanting to buy a house and we simply can’t because our credit file has been dead for a year. So, we have a credit card that we use on occasion just to keep it active.

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