Debt Reduction

Maximize The Power Of Micro-Payments

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!

15 thoughts on “Maximize The Power Of Micro-Payments

  1. I do this except I put the money into an account, and then “dump” whatever’s in that account into my snowball every 2 weeks.

    My credit card only allows 4 online payments per cycle. I guess I could do one a week but this seems to work for me.

  2. The theme of micro-payments is actual enough in the world, I regularly use this system, it орпавдывает myself for all hundred percent

  3. I have been making micro payments, they are so satisfying! I do find that since I am just beginning my debt snowball, I sometimes over extend myself and end up without funds. I have gotten a handle on this by making sure I always have a little cushion.

  4. I have started “sweeping” what is left in my checking account before payday into a micropayment on some pesky credit card debt. It may be $20 or it may $100. Small changes and small amounts do add up after a while.

  5. Is there a calculator available that will let you see the effect of micropayments on your balance? The one I used is to calculate using the debt snowball.

    I’m currently on track to pay off my credit card debt in full by September 2013 *gulp*. I’d love to see how that would change if I broke those payments down into 2 or 4 micropayments to each creditor.

  6. One of the BEST tips I’ve learned from finance blogs (that, and paying your CC bill early to reduce interest). Even when it doesn’t make a huge dent in the bottom line, it FEELS great and I get a kick/boost from knowing I am chipping away at my debt!

  7. This system can be used to pay yourself as well. Sweeping small amounts into savings also feels great when you step back and take a look at the end number

  8. I’ve used micropayments on our mortgage. However, it’s best if you can view your mortgage online. 50% of the time, our mortgage company applied the extra payment to our escrow account, even though I attached a note “apply to principal.” I’d call them and they’d always admit it was their error. But I wonder how many other people didn’t check and therefore never reduced their principal. Don’t trust your mortgage company to post it correctly!!

  9. I’ve recently started using a similar method. The day my paycheck hits my checking acct, I move everything that was left over into savings. Throughout the month, if I get little bits here and there, I pop them into savings. Then I make one big payment on a card. What’s great about this method is that the money is difficult for me to get at and it’s effectively ‘spent’ in my mind, but it sits in savings to ‘cushion’ my checking acct, just in case (they’re linked for overdraft protection). If I’ve miscalculated or forgotten an expenditure (as has happened on occasion), I won’t rack up overdraft fees.

  10. I think most of the people commenting are confusing micropayments with snowflakes. Although both reduce the interest, micropayments are basically taking snowflakes one step further by applying the payments to the loan at various times during the month. This reduces the balance on a daily basis which in turn reduces interest. You need to test out your loan/cc with the first couple payments though. Some companies will reduce your monthly payment by the amount you need. Citibank/Student loan corporation is notorious for this and I’ve found I can only send in extra payments in the 5 days between my due date and when the next statement is available.

  11. I realize this is an old post but since you linked to it in your Mortgage Payoff Progress post I’ll add my 2 cents worth. Micro-payments are helping us get out of debt quick! We’ve sold stuff on eBay,, Craigslist, etc and for everything we sell we deposit the money into our account and immediately schedule an online payment to the credit card company. In March we made 6 additional payments on top of the regular payment.

    This process works great for credit cards but interesting enough for our mortgage company it won’t help us. I called and asked about bi-weekly payments. The rep told me I could make them but they would only credit the account once a full payment had been received. What we’ve done is to up the mortgage payment by an extra $110 per month which in the long run is the same as making 13 payments a year.

  12. Love the idea. I use it in conjunction with some obnoxiously kindergardenish type chart where I get to put smiley faces on each $50, or some other equally silly thing. It works for me. A few years ago, we had a car loan and I made it my goal to pay off the loan before we moved that year. Big chart on fridge, car paid off. It is amazing what a little daily motivation can do.

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