Debt accumulates over time, a little bit here, a little bit there. You don’t notice the balance growing until it’s too late. Why not take the same approach to pay off debt? Making multiple, small payments each month can help you pay down debt sooner or keep your balances in check in the first place. And you’ll likely find it much easier to manage small payments than one large payment.
The problem with waiting until the bill arrives to pay off a credit card charge or make a payment is that, unless you’ve budgeted wisely, you may not have the money to pay off the debt when the bill arrives. And let’s face it, most people don’t like to budget. That’s why I recommend that the best way to avoid accumulating debt in the first place is to pay your bills whenever you get paid. If you get paid weekly, make a small micropayment towards your balances every week.
If you carry balances, making small weekly payments can help you pay off your debts much sooner, here’s why:
- You will avoid late fees. If you make small regular payments each month, you are less likely to miss a payment which means no late fees. Late fees can range between $25 and $40 which can be the equivalent of one extra small payment alone.
- It’s easier to make extra payments. By paying weekly, you make 52 small payments instead of 12 larger payments. Not only is this easier to manage financially, but you’ll make one extra ‘free’ payment by the end of the year. Let’s say, for example, you want to pay $400 a month towards your credit card debt, that adds up to $4,800 a year. If you pay $100 a week, you end up paying $5,200 against your credit card debt. That’s one extra monthly payment.
- You pay less interest. Credit card companies charge interest on your average daily balance. Making small payments more often puts the benefit of compound interest to work for you, instead of against you. Every time you make a payment your balance declines and the daily interest charged on that balance falls as well. The quicker your balances decline, the lower your overall interest costs. This saves you money and helps you pay off your credit card debts sooner.
- Your balances fall faster. More payments and less interest mean you will reach a zero balance on your card much earlier. Once you do, continue to make small payments towards any new charges, so you avoid accumulating new debt in the future.
- When cash flow is tight it keeps balances under control. If you hit a period where your income has dropped for any reason, making small payments throughout the month based on what cash you have available can be a good way to help keep your balances as low as possible until you can go back to making larger payments. Again, the earlier you pay off your balances, the less interest you pay, reducing your balances down the road. Interest on interest is what causes credit card debt to balloon very quickly.
- Your credit score improves. The higher your credit balances as a percentage of your credit limit, the lower your credit score. To have a good credit score, you never want your balances to exceed 50% of your credit limit on any day of the month. If you can keep your balances no higher than 35% that’s even better for your score. Making small payments keeps your balance low all month, lowers your credit utilization rate, and improves your score. A higher score can help you qualify for lower interest rates, saving you money and helping you pay down debt faster.
Making Micropayments Easier
Some other tips that can help you set up a plan to micro-manage your debt repayment:
- Try to pay at least the minimum payment twice a month. Of course, pay more if you can.
- Use online banking to set up multiple payments. Most credit card companies allow you to make unlimited payments, however, always check your credit card company for any limitations.
- Take advantage of any windfalls. If you receive a bonus, a birthday gift or even win a small amount on the lottery, put all or a portion of that towards debt repayment right away. No need to wait for your next due date.
Can multiple payments help your credit score? Making extra payments does not, by itself, improve your credit score. However by making additional payments you help you credit history by avoiding late payment notices, and lowering your balances means you are using up less of your credit limit which can increase your overall score.
Is it bad to pay credit cards before the due date? It is OK to make a payment before the statement due date, in fact, you should always make at least the minimum payment owing on your credit card before it is due. Making early payments can help avoid the risk that your credit card company won’t process your payment on time which can result in a late payment charge and lower your credit score.