We are in the home stretch of paying off credit card debt balances. As a reward for the extra large payments we’ve been sending our credit card issuer, they have graciously offered us the opportunity to skip a payment this month. Thanks, but no thanks.
When It Might Make Sense To Skip a Payment
Several months ago when we were just starting our plan we received a similar offer from a different credit card (they’ve since been paid off and closed). At the time we had very little in savings, and the balance was comprised of a low-interest balance transfer offer. Since we were not being gouged with an awfully high interest rate, we decided to save the minimum payment to help build our beginning emergency fund.
It might also make sense to to take advantage of a skip a payment offer from your credit card issuer if you are in the middle of a crisis – medical disability, recently laid off, etc. In these cases, cash in your pocket to pay basic bills is more important than a relatively small reduction of debt made by a minimum payment.
Why I Don’t Like Skip A Payment Offers
Assuming you have the money to make your payment, and you are not in the middle of a real emergency, I recommend not taking advantage of a skip a payment offer from your credit card issuer. Here’s why. The credit card company offering to let you slide without a payment does not suspend the charging of interest that particular month. Since interest is calculated on the outstanding average daily balance on your account, not making a payment means you will pay a little more in interest.
There is also a psychological risk associated with not making a payment. This risk is similar to the one associated with conducting a balance transfer, or debt consolidation. You think you’ve made progress, but you haven’t, you’ve simply shifted your money around. In the case of skipping a payment you are taking the $50 you were going to pay towards debt and tossing it in savings, or spending it, two activities than will not likely improve your situation that dramatically.
However, using that same $50 to pay down debt means a permanent $50 reduction in the amount you owe (minus a little interest accumulation, and assuming you don’t run credit card balances back up). If you owed $700 on a credit card that would look like a 7% reduction in the amount you owe. Not bad, especially considering that money tucked away in savings would probably be earning less than 2% interest a year.
The bottom line is to keep the right perspective with any offer from your credit card company: skepticism. Credit card issuers are in business to make money. It’s certainly not illegal, or immoral to turn a profit, but remember that every offer, every decision they make, has been run through numerous profitibality models, and risk assessments. They are not extending an offer to skip a payment, or increase your credit line, to help you.