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Investment Ideas Skipping payments, even at bank's invitation, is a dumb idea

Canadian Imperial Bank of Commerce says I deserve a break. It's right there in block letters at the end of my June Visa bill: "You deserve a break!"

Does it make you suspicious when a bank says stuff like this? It should, because with banks the breaks go all their way.

What CIBC is offering its clients is the opportunity to not pay their credit card bills this month. "Making a payment this month is optional and you don't need to call us to accept this offer!" it writes.

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CIBC spokesman Rob McLeod explained in an e-mail that the skip-a-payment option has been made several times, and that customer surveys show it's a popular option. So much for the popular wisdom. Skipping a card payment is a bad idea because of the extra interest payments you'll incur, and the same goes for similar offers that apply to mortgage payments.

Why banks even offer the chance to skip a payment is hard to fathom, unless you're a cynic who believes it's to squeeze a little more revenue from clients. This question is especially worth raising today, when many people are piling on debt through credit cards, direct loans and borrowing against the equity in their homes. A sharp rise in interest rates hardly seems imminent, but some of these people would be in trouble if we got one.

You'd think banks would want to get out in front of this risk by encouraging people to develop good credit habits. Instead, they're inviting people to skip credit card and mortgage payments, which is like a wink and a nudge suggesting that it's sometimes all right not to pay what you owe.

What happens when you skip a credit card payment is that interest builds up on your entire month's worth of charges at extremely high rates. My CIBC Aerogold card happens to carry a rate of 19.5 per cent, which is typical.

There's nothing hidden about the interest charges. Complying with banking laws, CIBC advises that regular interest charges will continue to accumulate and regular payments will resume with your next statement.

That next statement could be a killer if you don't pay anything in the current month. Because of home renovations, I racked up $6,276.39 in charges on my June bill; one month's share of the 19.5-per-cent annual interest on that amount would be almost $102.

The federal Financial Consumer Agency of Canada warns of another reason not to skip a credit card payment. If you do, you may put yourself in a position where you don't enjoy an interest-free period on the purchases you make in the month ahead.

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Credit cards typically start charging interest on your balance only after a period of time that spans the dates of your purchases and the time when your monthly payment is due. But if you're carrying a balance from the previous month, some banks cancel the interest-free period and start charging interest immediately.

FCAC says skipping a mortgage payment has even worse consequences because of the larger amounts of money involved, and because you may be able to do this three or four times during the term of your mortgage.

When you miss a mortgage payment, you extend the time it will take to pay off the loan because you haven't paid back the scheduled amount of principal. Worse, the interest you missed paying is added to what you owe, creating a situation where you'll pay interest on interest.

You'll resume your regular mortgage payments just as they were before, but the balance outstanding on your mortgage has been re-adjusted.

An interesting thing about bank offers to skip credit card payments is that the practice doesn't mesh at all with the messages about credit that Visa and MasterCard Canada seem to want to project. Both card companies have consumer education modules on their websites that clearly advise people to be responsible with credit.

"Your monthly due date is a deadline," MasterCard's website says. "Pay your entire bill, or everything you can afford, each month just like you would your rent." Among the suggestions on Visa's website: "Pay your bills on time."

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The worst thing about the skip-a-payment option is that banks pretend they're doing you a favour, when in fact they're helping themselves. It's a pattern of behaviour you see elsewhere, like in those credit card convenience cheques that gull you into taking a cash advance on your card. Cash advances don't get an interest-free period like regular purchases on a card, so they're strictly for emergencies.

Banks make money off providing credit and there's not a thing wrong with that. But if there's ever a reckoning for those who have overextended themselves with credit, people are going to remember how the banks conducted themselves back when these debts were being racked up in the first place.

rcarrick@globeandmail.ca

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