As a result of the economic downturn, millions of Americans have sought financial relief. Credit card companies have stepped up to offer support, but the question stands, is it in my best interest to take the offer or continue to pay as planned?
Should you take advantage of a deferred payment?
Probably the most known form of relief comes in the form of not having to make a card payment for a certain period. The name for this relief may be called payment holiday or payment deferral but regardless of the name the specifics are found in the fine print. While the large print language may explain that your COVID relief may come in the form of suspended payments, keep in mind the primary business of a credit card company is collecting interest on debt they are owed. While you may experience less monthly financial stress thanks to waived late fees and penalties, remember that deferred payment has not disappeared into thin air.
Based on my research, no credit card companies are offering relief from the monthly interest owed. In most cases the interest is simply added to the balance of the credit card. Many credit card companies are deferring the expected principal payments rather than adding them to the balance owed but that policy is not universal. In fact, one of my coworkers alerted me that her credit card company gave her a payment holiday without her requesting one but also added the suspended interest and principal amount to her principal balance.
Should you take these offers for reduced or suspended payments? If you are in a circumstance where you have been significantly affected by COVID financially and really need the relief, then deferring the payment can be useful. Just keep in mind that even though the company is waiving fees and credit reporting for this program it can still have a negative effect on your long-term financial wellness. Those payments you forgo are ultimately added to your principal balance. As a result, you are paying interest on not just your old purchases but also on interest accumulated and possibly the principal payments you missed. For this reason, if you can continue to make payments it may be a good idea to do so.
Strategically, you may be able to use these programs to pay off your debt faster. If you can confirm the principal portion of your minimum payment is not being added to your balance, consider putting your lower interest cards into deferment and use the principal savings to accelerate your payments on the highest interest debt. Keep in mind your credit card company will want you to explain how you are negatively affected by COVID before allowing you to do this.
Request a change in your credit terms: Credit cards tend to have flexible terms for the lender. They can change the rules on interest rates, rewards programs, and due dates with simply the issuance of a notice. Conversely, you as the borrower can ask them to make changes as well.
You can call your credit card company and ask them to make changes to make it easier for you to pay down your debt. They certainly have the right to refuse, but this may be an opportune time to reach out to your credit card company and ask them to lower your interest rate or move the due date to a better time. Also check to see if they will waive or lower annual fees.
If you plan to ask the company for an increase in your spending limit, you will want to know if they will be making a hard inquiry on your credit report to do so as this may affect your credit score
Additional time to earn rewards: Many credit card companies are extending the timeframe to accumulate points for sign-up bonuses.
Alternative uses for rewards: Several cards that have focused on travel-related rewards are shifting to allow points to be used to pay for groceries and food delivery. This could certainly help if you are in a cash crunch but keep in mind your long-term goals for those points. Eventually, travel will return.
Right now is a good time to review your credit cards and what they are doing to help their customers during the pandemic. You may be missing out on an opportunity to customize your credit situation for you.