O’Connor: Don’t skip a payment just to skip town
It’s vacation season, so it’s time to break out the bug spray and Benadryl and, thanks to the arrival of some junk mail, General Order No. 2 of the Funny Money column. It is, as you may recall, that “Whenever someone in the financial services industry says anything is being done ‘to serve you better,’ it’s time to break out the gas mask and pooper scooper.”
Which brings us to those “skip-a-payment” offers showing up in the mail. These come-ons allow you to take a pass on one monthly payment of your credit card, car loan or even mortgage. The offers show up at the holidays and vacation time, when the family budget can be stretched tighter than usual.
On the surface, it looks like a good deal that frees up cash so you and the family can tour the Rockies, relax at the beach or cruise the Gowanus Canal, especially if it means you won’t add some of the trip expenses to your credit card balance.
The problem is that you’ll go on vacation, but your interest payments won’t.
Wish you weren’t here
Skip-a-payment options do two things: First, they delay paying down your balance by a month, meaning it takes longer to pay off that balance while you continue to pay interest. Second, your interest payment in the skipped month is added to your balance, so you’ll be paying interest on that unpaid interest, too.
Oh, wait, there’s a third thing: Local banks and credit unions that make skip offers often charge a fee for the service of about $25. So you’re paying for the privilege of digging yourself deeper into debt.
“Any trick that the credit-card issuers can come up with to entice you to not make your payment in full and incur interest charges, they’ll try,” says John Ulzheimer, a credit expert and former executive with the credit scoring service FICO. “In the summer, you have people taking vacations and, if they’re carrying a large balance on a credit card, to be able to skip a payment is an enticing offer.”
The fine folks at CreditCards.com have done the math for us, so let’s see how it works out. On a card charging 11.99 percent interest with a balance of $5,000, skipping your $100 minimum payment for one month means you’ll take another two months to get your balance down to $0.00, and costs you another $199 in interest.
So saving $100 this month costs you nearly double that amount down the road, or more if your interest rate is higher.
That’s one expensive mai tai!
The only time it can make sense to skip a payment would be during some dire financial calamity, such as losing your job or getting hit with a major illness, according to Bill Hardekopf, CEO of the credit card site Lowcards.com.
“We never think it’s a very good idea at all unless you’re in some kind of crisis mode,” Hardekopf says. “Otherwise, there’s the temptation of being left with another couple of hundred dollars in your wallet, so you go out and buy something stupid. It’s not a very good idea.”
Let’s all agree that the definition of “financial emergency” doesn’t include a week at the beach or a trip to Wally World. If you need to free up cash for a vacation, scoop up all the loose change in the house, throw a garage sale, pack your lunch for a month or adjust your withholding to get more cash now instead of a big tax refund next April.
And when it comes to skip-a-payment offers, just skip ’em. Now, if you’ll excuse me, I need to go — it’s gets awfully hot under this gas mask.