How much do you spend daily on small purchases like coffee and newspapers? If you made small payments to your credit cards instead, would you save money? Called micropayments, small payments to your credit cards can reduce your interest costs and the amount of time it takes to pay off your debt. However, some credit card companies may change fees for extra payments.
Making small daily payments to your credit card results in reduced interest charges, a shorter payoff time and increased motivation and gratification. In some cases, your creditor may charge fees for making all these payments, so check with the card company's policies first.
Interest, also called annual percentage rate, is your fee for borrowing money on your credit card. If your interest rate is 10 percent and your balance is $10, you will pay a fee of $1. Bankrate notes that most credit card companies charge interest based on your average daily balance. If you pay a little each day, you reduce that balance and therefore the interest you are charged, saving money.
Shorter Payoff Times
If you pay a small amount daily as well as your minimum payment, you can drastically cut your payoff time. For example, if you owe $5,000 at 5 percent interest and are making minimum payments of $25, it will take you more than 35 years to pay off the card. If you make your minimum payment of $25 on the same card, but also pay $5 per day, you'll pay an additional $150 in a 30-day month and pay the card off in around three years. Use an online credit card payoff calculator to determine how long it will take you to pay off your credit cards using small daily payments. Even if you can't make both small daily payments and your minimum due, making small payments will reduce your payoff time because you will pay less interest, and the smaller your balance, the faster it is to pay off.
Increased Motivation and Gratification
If you don't feel like you're getting close to a zero balance, it's hard to get motivated about and stay focused on paying off your credit cards. When you make small daily payments, you get the instant gratification of seeing that payment come off your balance immediately. You'll also start to notice your balance shrink as your payments add up and your interest falls. Because you're making a payment each day, the idea of debt reduction is also always fresh in your mind, so you'll be even more cautious about using your credit card while thinking frequently about other ways to put dents in your debt.
Maximizing Your Daily Payment
Paying a small daily amount on your credit card works best when you also make your minimum monthly payment. If you can't do both, call your credit card company to ensure that all of the payments you make will be applied to your minimum as long as they're received by your due date. Otherwise, you could be charged a late fee, which would negate any interest you saved. Also, check with your credit card company to determine if you'll be charged a fee for making multiple monthly payments. If your company will assess a fee, avoid it by setting up a new checking account and making your daily payments into the checking account. At the end of the month, make a payment from this checking account to your credit card.
- Bankrate: Average Daily Balance
- CreditCards.com: Cut Your Credit Card Debt Using Micropayments
- Credit Karma: Debt Repayment Calculator
- Discover Credit Card Resource Center. "What is a Credit Card Minimum Payment?" Accessed Jan. 31, 2020.
- Capital One. "Here's What You Should Know About Late Credit Card Payments." Accessed Jan. 31, 2020.
- Bank of America. "How Mortgages Are Approved." Accessed Jan. 31, 2020.
- Consumer Financial Protection Bureau. "Truth In Lending Act - 12 CFR § 1026.7 Periodic Statement." Accessed Jan. 31, 2020.
Miranda Morley is an educator, business consultant and owner of a copywriting/social-media management company. Her work has been featured in the "Boston Literary Magazine," "Subversify Magazine" and "American Builder's Quarterly." Morley has a B.A. in English, political science and international relations. She is completing her M.A. in rhetoric and composition from Purdue University Calumet.