I am a big fan of micro-payments. If you are unfamiliar with the term, a little background information might help.  Back in 2005, while working to pay off my debt, I decided to try a little experiment.  Instead of sending just one payment to my credit card company each month, I started to send several.  I called these small payments micro-payments.  At one point, I actually sent $5 a day (via online bill-pay) to one credit card company, just to see if the system would work.  (I don’t recommend sending micro-payments quite that often, and I only did it for one month, as proof-of-concept.)  At the end of the month, my balance was reduced by an additional $150, above and beyond the amount of my regular payment.

Throughout this article, whenever you see the word month, feel free to substitute the words billing cycle.

Micro-payments are simply extra payments, made throughout the month.  They are designed to reduce a credit card balance and to keep one’s mind focused on the debt reduction process.  These extra payments are additional payments, and are only made after minimum monthly payments are made (on time), to each and every creditor.  Also, micro-payments are not intended to replace debt snowball payments, but are intended to compliment those payments.

Perhaps an illustration is in order -

Assume that you have three credit cards that you are trying to pay off -

Credit Card A with balance of $5000 @ 10%

Credit Card B with balance of $6000 @ 12%

Credit Card C with balance of $8000 @ 8%

Further assume that you are using the debt snowball method to reduce your debt -

You will make minimum payment + extra payment to Credit Card A

You will make minimum payment to Credit Card B

You will make minimum payment to Credit Card C

Remember, if you use the typical debt snowball, you will pay off debts, starting with lowest balance first, regardless of interest rate.  If this method does not suit you, you might consider the debt deluge – a modified version of the debt snowball.  Use online bill-pay to simplify the process and save on postage.  When making minimum payment and extra payment to Credit Card A, feel free to send one payment, equal to their combined total.

After making all minimum payments and your extra payment, it is time to focus on micro-payments.  Throughout the month, look for opportunities to send in micro-payments, as you earn additional income, receive monetary gifts, or spend less than anticipated in certain budget categories.

Assume that in Week #1 –

You receive $25 as a birthday gift

You sell a few books online, netting $15

You ride to work with a friend, saving $10 in gasoline

At the end of Week #1, you have the following options -

You could spend the $50

You could save the $50

You can could send the $50, as a micro-payment, to Credit Card A

Since you have already sent in your minimum payments (on time) to all creditors, and you have already sent your scheduled (and budgeted for) extra payment, any of these options is available to you.  (We will assume that you already have a small cash reserve set aside for small emergencies.)  And, if you are uncomfortable sending the entire $50 as a micro-payment, you could send just a portion of the $50.

By now, you might be wondering -

Why worry with micro-payments in the first place?

Why not just one, larger, extra payment at the beginning of the month?

Why not send just one, larger, extra payment at the end of the month?

Not only am I a rational being, but I’m also an emotional being.  As such, it’s important for me to remain engaged – focused – on any project on which I am working.  When it comes to debt reduction, this was doubly-important.  Not only was I trying to do away with 15 years of negative behaviors, I was also trying to replace those behaviors with positive behaviors.  By constantly looking for ways to save money – I remain engaged.  By thinking about ways to earn additional income – I remain focused.  Just thinking about ways to save a little more or earn a little more, so that I could make a micro-payment, kept me emotionally involved in the debt reduction process, in a way that the one-payment-per-month-method never would have.

There is also a mathematical reason for sending micro-payments throughout the month.  Most credit card companies use the average daily balance for calculating how much interest they charge.  Making payments as soon as is possible will lower the average daily balance, thereby reducing the amount of interest owed.  If you save up an additional payment and the send it when you get your next bill, you might be paying unnecessary interest.  In other words, if you receive $50 as a birthday gift, and you have no real need for it, send it in as soon as is possible, thereby reducing your average daily balance.

There is an additional reason for using micro-payments, one that was very important to me while I was getting out of debt.  I like to set goals – ambitious goals.  There are times, however, when my goals are a bit too ambitious.  For instance, let’s assume that my budgeted extra payment to Credit Card A is $500.  For some, $500 might be a reasonable amount for an extra payment.  For others, $500 might be a stretch.  So, instead of sending in $500 at the beginning of the month, there might be times when it would be better to send in a $100 extra payment, and then, throughout the month, send in four additional $100 micro-payments.

This might be true, especially, for those who are paid on a weekly basis, those who have irregular income, or those who are new to budgeting.  It is very easy, especially in the early days, to over-estimate how much money you actually have for debt reduction.  We do not want to find ourselves, at the end of the month, with a need to use a credit card.  By spacing our micro-payments out, over a full month, we can better judge if our budgeted-for extra payment is practical.  If we find that coming up with $500 was easy, then we might want to send the full amount at the beginning of the month.  If we find, on the other hand, that coming up with $500 was impossible, we might want to budget $250, and the use micro-payments to send in extra, as we save it or earn it.

Please note:  Sending in a larger amount, earlier in the month, will almost always lead to a lower interest charge (provided the credit card company uses the average daily balance method for calculating interest).  Also, no matter what method you use, it is imperative to make minimum payments on time, to all accounts.

There are a few more things about micro-payments to keep in mind -

When sending micro-payments, be sure that you can comfortably keep track of them.  Online access to both your checking account and your credit card accounts is a must.  Also, the payments that I was making were initiated from my checking account to my credit card account.  In other words, these were payments, sent by me, via online bill-pay.  I did not use the credit card companies service, whereby they will deduct payments from a checking account.  For me, I never felt good about giving my credit card company, or any other company for that matter, access to my credit card account.  Four micro-payments per month, one each Monday, worked well for me.

Micro-payments can also be sent to pay off mortgages, automobile loans, and almost any other type of debt.  Just check with your creditors and ask them where to send additional payments and how to label those payments.  I always labeled mine – apply to principal.

It’s always important to have enough money to make all minimum payments.  In other words, don’t send every extra penny that you have in August, if in September, you aren’t going to have enough to make your minimum monthly payments.

Now that I am debt free, I no longer make micro-payments, but I do make micro-deposits.  At the beginning of the month, I set aside a budgeted amount for savings.  Then, throughout the month, I look for ways to save money or earn additional income.  Once or twice a month, I make additional micro-deposits to my savings account, thereby saving more, each month, than my original budget predicted.  This also works when making contributions to a Roth IRA.

Please be aware, some credit card companies may limit the number of payments that they will process in a given month.  Be aware of your credit card companies policies.  Also, be sure that you are using a free online bill-pay service to send your micro-payments,  avoid spending money on postage, and verify that your credit card company is receiving extra payments.

I would love to hear your success stories with using micro-payments.  Also, if you have any additional thoughts or tips, leave a comment and let us know about them.  Let’s eradicate some debt – so that soon we can all enjoy being debt free!

I love to watch football, especially my beloved Atlanta Falcons.  When I was a little kid, I played both running back and safety.  I really enjoyed being on offense, but I also learned the value of a good defense.  Throw in a little special teams unit, and you have yourself a complete team.

Thinking about debt reduction, I was reminded of the importance of the “team” concept.  I think it’s important to start with a solid defense, add in a powerful offense, and then compliment them both with some great special teams.  If we can find the proper balance between these three “units”, we can really dominate our debts – and soon be debt free.

Solid Defense -

Before I began repaying my debts, I established a small cash reserve – also known as an emergency fund – of about $2000.  Instead of relying on my credit cards for unplanned-for expenses, the small cash reserve provided a defensive cushion against life’s inevitable hiccups.  When I had to dip into my cash reserve, I would halt my aggressive debt repayments, rebuild the cash reserve, and then continue with my debt reduction plan.  Trying to reduce debt without an emergency fund is like playing football with only 7 men on defense.  You can do it, but it’s not very smart.

As I began to focus on reducing my debts, I always made sure to make minimum payments to all creditors – on time.  This helped me to avoid penalties (pun intended) like late fees and additional interest charges.  Even during the months when I could not make additional debt payments, I still made minimum payments.  One of the keys to debt reduction is to stop giving up ground (going deeper into debt) – and there’s nothing like making payments on time to reduce those dreaded fees and penalties.

I put my credit cards in my wallet – and then forgot that they were there.  Some will suggest cutting up credit cards or freezing them in a bowl of water.  For me, I wanted to learn a little discipline, so I simply put my cards in the wallet, and promised myself that I would not use them.  Four years later, this was one of the smartest decisions I’ve ever made.

Powerful Offense -

I created a debt reduction plan. I chose to make extra payments to the credit account with the lowest balance – others may choose to make extra payments to the account with the highest interest.  It doesn’t matter which plan you choose, but it does matter that you have a plan.  Some teams pass the ball, while others run.  Either style can win, but a team must be dedicated to its style of play.  The same is true about debt reduction.  Pick a strategy, stick with it, and stay focused.

I made multiple extra payments to a single account, each and every month.  Remember, as part of my defense, all minimum payments were made (on time or early).  After making those payments, I would spend the rest of the month feverishly working to make extra payments to the next account on my list.  A good offense is an intense offense.  This holds true for debt reduction, as well.  Honestly, if you are not a a little mad, and a little fed up, you might never get out of debt.  Making these multiple payments “kept my head in the game” and helped me maintain direction and focus.

Special Teams -

I made extra payments as early in the month as possible.  This reduced accrued interest, because it lowers the average daily balance.

I used unexpected income to boost my debt reduction payments.  I never considered using bonuses, gifts, or cash payments for anything other than debt reduction.  Remember, it’s important to maintain a laser-like focus.

I stopped waiting for the hail-Mary, and began to focus on the routine (and boring).  Instead of waiting for the next raise, or the next paycheck, or the next whatever, I decided to take the income that I was already making, and deal with my situation.  If I had continued to wait for things to “get better” – I’d still be in debt – and I’d still be waiting.

I decided that it was okay to be different.  Quick story – The other day I went to buy my wife a gift at a department store.  The customer service representative who sold me the gift asked me if I wanted to apply for a store-branded credit card.  I declined, even though the store was offering a 15% discount for signing up for the card.  The woman behind me in line could not believe that I would give up the “free money”.  I politely explained that my wife and I pay cash for the things we want.  The woman behind me said, “Yeah, that might work for your wife’s clothes, but I’ll bet you borrow money for things you want, like a new truck or a boat.”  (It felt a little odd to be having this conversation with a complete stranger.)  I said, again politely, “No, mam.  I pay cash for everything, including our last new automobile.”  She said, “Really?  Why?”  (At this point, I was almost tempted to give her the address for this site, but I refrained.)  I simply replied, “For 15 years, I lived paycheck to paycheck, and I borrowed money.  Now, I’m debt free, I pay cash, and I’m happier than I’ve ever been.  This is what works for us, and as long as it’s not broke, I’m not going to try to fix it.”  She then looked on, a bit stunned, as I pulled out my cash envelope, paid cash for a really nice gift for my wife, placed my receipt in the envelope, and headed on my way.  It’s fun to be different!

I want to thank those of you who have subscribed to No Credit Needed.  I’m back home from vacation and my family and I had a wonderful time.  Also, I noticed that several of you have followed me on Twitter.  Thank you so much, and feel free to drop me a tweet.  Regular posting will resume as of today!