Pay-later vacations drive up expenses

The only thing more difficult than deciding where to go on vacation may be paying for the trip.

As of November, Americans carried a record consumer debt of $2 trillion, according to the Federal Reserve. That figure doesn’t include home mortgages, but it does include credit card debt, auto loans and financing such purchases as travel.

Yet travel companies are increasingly offering financing options for their products, partly as a way to boost their profit.

“All the trends indicate that the leisure and travel industries are more than ever dependent on revolving credit,” says Robert D. Manning, an expert on the credit card industry and a business professor at Rochester Institute of Technology in New York.

The offerings are tempting. Take Carnival Cruises’ “Fun Finance Plan.” Carnival issues you a Capital One MasterCard to finance your trip. You can take a three-day “Fun Ship” cruise, starting at $299, and pay as little as $14 a month for 24 months, the ads on Carnival’s website say.

It sounds like a great deal, and on the surface, it is not bad. If you make your $14 payments on time, after two years you will have paid $336 for your cruise, a markup of just $37.

What is not included in those calculations (but is available from a Carnival customer service rep) is the information that even the best customers, who qualify for the lowest 9.9% interest rate, must pay a monthly fee of $4. During the two-year payoff period, that tacks on $96. Now your $299 cruise has cost you $432.

And if you are a greater credit risk, your interest rate doubles to 19.8% and your monthly fee is $6. Your $299 cruise is now $517.

Let’s say you have less-than-stellar credit and qualify only for the highest interest rates and fees for your cruise. Maybe you have other revolving credit. Let’s say that twice a year you’re late for a total of four late fees in two years. At $30 per late fee, tack on $120 and that $299 cruise costs $637 -- assuming you pay it off in two years.

Most credit cards require payment of only 2% of the new balance each month. Thus, your first month’s minimum payment on your $299 cruise would only be about $6 plus the $4 monthly fee. Paying only the minimum payment each month can stretch your payments from two to more than 10 years when you add interest (nearly $2.50 per month to begin with at 9.9%; $5 per month at 19.8%).

With interest and monthly fees, you could end up paying more than $1,000 for your $299 cruise.

If you are considering adding to existing consumer debt to finance your next vacation, Manning, author of “Credit Card Nation: The Consequences of America’s Addiction to Credit,” suggests you have a plan to repay it more quickly.

On his website, www.creditcardnation.com, he has created a tool called the Debt Zapper that can calculate how long it will take to repay a trip.

Experts who counsel consumers who have sunk into debt suggest restraint when it comes to financing a vacation.

“What is a vacation?” asks Howard S. Dvorkin, president and founder of Consolidated Credit Counseling Services Inc., a nonprofit debt-management organization. “Spending time away from work with people you like. You don’t have to spend big money to have a good time.”

He suggests day trips or other less-expensive vacations.

“You don’t have to spend $5,000 on a vacation to have a vacation,” he says.

If you want to take an elaborate trip, start a separate vacation savings account and have $50 or $100 per paycheck deposited directly into the account.

If you must finance a vacation, use the lowest-rate card you can find. Even then, you need to read the fine print because some have low teaser rates that increase. And always pay more than the minimum payment.

“Is it smart to finance a vacation? No,” he says. “No matter what the [vacation] deal is that you’re getting, after you add interest, it’s not such a deal.”

James Gilden can be reached at www.theinternettraveler.com.