How to Use Small Extra Payments for the Greatest Impact

Do One Thing: Consider paying part of your credit card bill a couple of weeks earlier each month to get in the habit of paying down the debt more quickly.

The Power of Micropayments

Here’s something that credit card companies charging sky-high interest rates may not want you to know. For those who don’t pay off their credit card balances at the end of the month, making smaller, but more frequent payments can reduce your interest costs and save you money in the long run.

Leverage Average Daily Balance

Credit interest is often calculated on an average daily balance rather than monthly totals — so lowering the balance earlier (during the month and throughout the year) saves you from paying quite so much in interest charges. If you are maintaining higher balances (and a higher credit utilization ratio) than you would care to, here’s some guidance on how making small extra payments over time can significantly impact how much you owe. 

Why Micropayments?

Making micropayments can be a good way to build momentum as you continuously chip away at high-interest credit card debt.

• How Micropayments Work. Instead of making one monthly payment to your credit card lender, you can send in multiple smaller payments during your billing cycle. 

Micropayment Math

Here’s an example:

• If you normally pay $300 at the end of the billing cycle
• You could pay half that amount – $150 – a few weeks earlier.
• Or pay $75 three weeks early, another $75 two weeks before the due date, and then $150 when the payment is due to equal that same $300 total payment.

Why Timing Matters

• Micropayments lower your balance faster because when you pay your bill, it makes a difference. 
• If you pay once at the due date, interest accrues all month. 
• But if you pay earlier or multiple times, interest accrues on a lower balance for a longer period.
• With more frequent payments, you can shrink the balance sooner if you are not adding to it by charging more on the account.
• So making multiple payments can reduce the average daily balance and lower total interest over time.

Making Micropayments Automatic

To simplify this process:

• Log in to your financial institution’s website, where you already check your account balances.
• Set up automatic transfers from your checking account every two weeks for a high-interest credit card bill.
• Doing this will allow you to make 26 payments a year instead of just 12.

Don’t Wait for Lump Sums

Shar-Né Warren, CFP, CRPC, founder and financial planner for Financial Excavation, has recommended making smaller micropayments to her clients. 

“They can be effective tools to remind clients that they remain in control,” she explains. “They address the debt right away rather than waiting for ‘perfect conditions’ or larger lump sums. They also show how small efforts can make a difference and help develop a new, motivating habit for debt repayment.” 

Focus on One Loan at a Time

Warren says that the most common issue she sees regarding making multiple smaller payments each month is when someone attempts to make micropayments on several loans simultaneously. “Instead, I recommend that my clients concentrate on paying off one debt at a time by making extra payments, while continuing to make only minimum payments on all other debts.”

Avalanche and Snowball Methods work with Micropayments

“Before suggesting a strategy, I consider my clients’ motivations. Both the debt avalanche and debt snowball methods, coupled with micropayments, can be effective for paying off debt,” Warren recommends the following:

• If you seek quick wins, the debt snowball — paying off the smallest monetary debt first — often provides that.
• If they aim to save the most money, focusing on the debt avalanche — paying off the highest interest debt first — will be more beneficial.
• The key is to start right away.

Not All Debt is Created Equal

If you decide to try out the micropayment plan, remember that not all debt is bad debt. The debt we incur to buy a home or to pay for an education usually comes at a much lower cost, as in a lower interest rate. Plus, mortgages and student loans can also be considered investments in your future.

Making Micro Mortgage Payments 

That said, micropayments can result in extra principal paid toward your home loan each year. This typically works best if your interest rate is higher than 3%.  For example:

• If your monthly mortgage payment is $1,500 and you pay biweekly, that equates to paying $750 every two weeks.
• The result is that you make 13 full payments in a year (or 26 micropayments) instead of just 12.
• That extra payment should go almost entirely to principal, which reduces your total interest and can shorten the length of a loan by years, if you aren’t penalized for making early payments.

Do Your Homework

Before making micropayments to your home loan lender, make a call to confirm:

• Payments are applied immediately, not held in a suspense account 
• The extra money goes to the principal, not future interest
• There are no prepayment penalties 
• Your lender allows partial payments

With reporting by Casandra Andrews