Credit Card Skip-A-Payment Offer Does You No Favors

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.

Comments

  1. It’s a nice feature to have since it may come in handy in a REAL emergency.

    But logically, the only reason it’s offered by the banks is because it benefits the banks in their attempt to keep you as a customer for life. We should reject that kind of “priviledge” on instinct!

  2. @JT Locke: My score dipped a bit after closing two or three cards. It’s hard to know what to blame it on since there is no way to isolate the impact of those one or two moves.

    Conventional wisdom says to leave accounts open, or at least the oldest ones. But I rarely listen to conventional wisdom.

  3. Another “service” that isn’t exactly a favor is the “convenience check” that sometimes comes attached to the bill.

    It’s possible to rack up thousands of dollars in debt with one easy transaction. Then even if the “convenience check” has a zero percent interest rate ALL of the other higher-rate debt continues to accrue interest until the low-balance debt is paid off completely. The payments you make will be applied toward the lowest interest debt, so the higher interest debt is in a sense protected.

    Never have I heard of a bank offering a service to any customer that didn’t translate into some added revenue or cost savings for that bank. It doesn’t make sense from a business perspective given that a bank exists to make money for its shareholders. The dynamics are different for a credit union, because its customers and its shareholders are the same people.

  4. Another “service” that isn’t exactly a favor is the “convenience check” that sometimes comes attached to the bill.

    It’s possible to rack up thousands of dollars in debt with one easy transaction. Then even if the “convenience check” has a zero percent interest rate ALL of the other higher-rate debt continues to accrue interest until the low-balance debt is paid off completely. The payments you make will be applied toward the lowest interest debt, so the higher interest debt is in a sense protected.

    Never have I heard of a bank offering a service to any customer that didn’t translate into some added revenue or cost savings for that bank. It doesn’t make sense from a business perspective given that a bank exists to make money for its shareholders. The dynamics are different for a credit union, because its customers and its shareholders are the same people.
    OH! You’re my new favorite blogger fyi

  5. You should always be skeptical of these types of offers. The credit cards companies will bleed you dry if you let them and this is just another way for them to increase their profits by seemingly doing you a “favor”.

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