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Should you take a credit card payment holiday during coronavirus pandemic?

Credit card borrowers who take three-month payment holidays could end up adding nearly £100 more a year in interest when they start making payments again compared to not taking one.

While customers make no payments for three months, credit card providers in most cases still charge interest, meaning borrowers continue to rack up interest.

The interest added during this three-month period pushes up borrowers’ balances, inflates the minimum payment they have to pay each month after the holiday and can ultimately take them longer to clear their balance at a higher cost.

Freeze: Applying for a credit card payment holiday means you pay nothing for up to three months, but you will still incur interest despite not paying anything off

Examples from Barclaycard and Santander highlight why only those who really can’t afford to make payments at the moment should consider taking payment holidays on things like credit cards, which have higher interest rates than mortgages or unsecured personal loans, even though the balance is likely to be lower. 

Instead, someone previously paying off their balance in full or paying a fixed amount could choose to pay a lower sum each month, while someone already paying the minimum could try and speak to their bank to see if they are allowed to make a payment of less than the minimum each month, but still pay something.

Experts said borrowers should be sure to contact their lender before simply applying for a payment holiday, to ensure they are taking the best course of action. 

Alternatively, those with a good enough credit score to do so could switch to a card with a lower APR or even an interest-free term, but that is not an option open to everyone.

Could a three-month credit card payment holiday cost you more?
Current card balance  APR  Minimum due  each month pre-holiday Minimum due post-holiday  Interest added during holiday Estimated additional Interest per year
£1,000 18.9% £25  £26  £44  £10 
£1,000  21.9%  £27  £28  £51  £14 
£1,000  29.9%  £32  £34  £68  £22 
£4,000  18.9%  £98  £103  £177  £42 
£4,000  21.9%  £107  £112  £203  £56 
£4,000  29.9%  £128  £137  £270  £89 
Source: Barclaycard/Santander 

Crunching the numbers 

Someone with a £4,000 credit card balance on a card with a 21.9 per cent APR would, according to figures from Barclaycard, incur £203 in interest over the course of a three-month payment holiday.

This would push up the minimum amount a borrower had to pay each month from £107 to £112 and see them incur around £56 more a year in interest than if they hadn’t taken the holiday. 

Take five

Credit reference agency Experian recommends borrowers consider five things before they apply for a payment holiday:

1. Choose the right support

Most lenders are offering additional support, called forbearance, if you’re struggling because of the pandemic. 

This could be something like reducing or pausing monthly payments. Before you make any decisions, make sure you know what you can afford to repay.

2. Steer clear of missed payments

If you’re struggling or you think you might miss a payment, don’t ignore it or cancel your direct debit. 

Unauthorised missed payments can lead to penalties and could reduce your credit score. 

Speak to your lender as soon as possible to discuss all your options, as a lot of banks are waiving missed payment fees provided customers are on a payment holiday and have spoken to them first. 

3. Don’t forget the interest

During your payment holiday interest will still be charged and added to the balance. So, you’ll likely see your minimum monthly payments increase when it ends. Keep an eye on your balance so the added interest doesn’t put you over your limit.

4. Shop around before you apply 

Making multiple credit applications can reduce your score. If you apply for credit, use comparison services shop around without damaging your score. That way, you’ll only apply for deals you’re likely to get and will avoid any unnecessary ‘hard’ credit searches.

5. Play your cards right 

Low credit card balances can give your score a boost. If you take a payment holiday, remember that interest will still be charged and added to the balance. 

So, you may want to make a reduced payment, or try to pay a little as and when you can.

This assumed they didn’t add anything more to the card over that holiday and the borrower paid only the minimum amount each month.

It would take 30 years and four months to clear a £4,000 balance paying only the minimum payment each month, and see a borrower charged £6,450 a year in interest. 

Taking the three-month holiday but sticking to the slightly higher minimum payment would cost a borrower £348 more in interest and lengthen the time to clear the balance by five months.

If a borrower had a card with a higher APR of 29.9 per cent and the same amount on it, taking a holiday would see them incur £270 in interest and pay £89 a year more than they otherwise would do.

Alastair Douglas, chief executive of credit comparison site Totally Money, said: ‘Customers should only really apply for a payment holiday if they need to as a result of coronavirus. 

‘This is because interest will be added to the existing amount, which makes the overall debt and future repayments more expensive. 

‘A better option, if possible, is to make smaller repayments and keep on reducing the balance. Anyone who has existing financial difficulties should contact their lender to make other arrangements.’

Nearly 1.2million credit card and personal loan borrowers are on payment holidays at the moment, according to banking trade body UK Finance. 

More than 40,000 Santander borrowers have been granted payment holidays as have 393,000 Lloyds Banking Group customers, which includes Halifax and the credit card provider MBNA.

Other banks did not supply individual figures for unsecured borrowers. 

While all banks are handling the process differently, most banks require customers to fill out an online form to request a payment holiday, but do not appear to be checking whether borrowers are in financial difficulty before they can take a holiday.

Barclaycard and Lloyds have said customers who have missed one credit card payment or less can take a holiday, while Santander said those behind on their payments can take a holiday.

A similar situation has happened with three-month mortgage holidays, with those whose finances have not been hit in theory able to put their payments on hold for three months, although they shouldn’t.

Mr Douglas added: ‘While payment holidays are an attractive option for many, people must understand there are added costs involved, and that they must apply for the holiday instead of just stopping payments. 

‘Get in touch with your lender if you need one. If it’s not sorted properly, it will count as a missed payment, which will harm your credit score.’

John Webb, a credit expert at reference agency Experian, said: ‘If you’re struggling financially because of the pandemic, you might be unable to meet your regular monthly payments. 

‘If so, it’s important to contact banks, lenders and other providers to discuss your situation right away. 

‘This will allow you both to agree the best course of action. 

‘Before you agree to a payment holiday on your credit card, remember that interest will still be charged. 

‘This means your debt will grow and, after the payment holiday, your monthly payment will likely increase. 

‘This is why it’s important to discuss with your lender whether a payment holiday is the right option for you.’

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