If you have a daunting amount of debt, sending in small payments throughout the month (instead of one large payment on the due date) could help you stay motivated.
This “slow and steady” tactic, also called the “micropayment” method, or “snowflaking,” can help you keep a sustainable pace in your debt pay-down race, proponents say.
“Snowflaking is taking little bits of money, no matter how small, and applying them to your debt,” says Julie Mayfield a personal finance blogger in Overland, Kan. “Over time, those little bits of money can add up … That's when the snowflakes turn into a snowball.”
A mother of two, Mayfield started a blog — The Family CEO — eight years ago to chronicle her family's efforts at paying down debt and saving money. She discovered snowflaking in 2010 and was immediately taken with it.
While her family's income was enough to keep up with credit card debt and a home equity loan, “we wanted to get rid of as much of it as we could,” Mayfield says. “I started looking for any amount of money I could to throw out our debt. It became like a game to me.”
Here's how to make micropayments work for you — and the limitations issuers may impose on this method. (see chart below)
The origins of snowflaking
In 2009, financial author and radio host Dave Ramsey helped popularize the “snowball” method of debt repayment. Contrary to popular financial wisdom, which states that it's best to pay off the credit card with the highest interest rate first, Ramsey advocates paying off the credit card with the smallest balance in order to create a quick win. Small victories yield large results, Ramsey argues, by creating emotional momentum that has a snowball effect on debt repayment.
The snowflake method of debt repayment utilizes the same basic principles as the snowball method (quick wins and small sums) but with a different spin: Instead of making one big payment per billing cycle, you make several little payments, called micropayments. Those micropayments cumulatively become the snowflakes that give the debt-repayment snowball momentum.
“Say your monthly payment is $60,” explains Howard Dvorkin, founder of Consolidated Credit Counseling Services and author of “Credit Hell: How to Dig Out of Debt.” “Instead of paying one $60 payment on the 29th of every month, maybe you pay $2 a day, or $15 a week.”
Applied toward one's regular payment, or in addition to it, micropayments typically utilize extra funds and loose change. For example, the money you save packing a lunch instead of going out, the money you find in your pockets when you're doing laundry or the money earned by selling old possessions online can all be applied incrementally toward your credit card payment.
“We all have these little bits of money that come into our bank accounts and wallets. If we don't have a job for them to do, they tend to get swallowed up by everyday spending,” says Mayfield, who has snowflaked everything from birthday checks from her in-laws, to health insurance reimbursements, to cellphone rebates.
Why micropayments work
Assuming your issuer imposes no restrictions, you can make five payments a month or 50. You can pay $1 at a time or $100. By paying a little at a time, you realize several benefits:
Reduced interest: When you wait an entire month to make a payment, interest accrues on the entire balance. When you make micropayments, you reduce the balance further, faster. “The faster you put money toward your accounts, even small amounts, the less interest you pay,” Dvorkin says.
Faster debt reduction: Some people are spenders, not savers. For them in particular, snowflaking results in faster debt reduction because it encourages them to apply extra money to their debt immediately. If those same people had to save the money until the end of the month, they would likely spend it on something else before their payment was due. “It's great for somebody who doesn't have the discipline to save money and is afraid that the $10 they've been holding onto might run through their fingers,” Dvorkin says.
When they're applied as extra payments (on top of what's needed to make the monthly minimum), snowflakes can benefit spenders and savers alike, points out Sandy Shore, community liaison for Novadebt, a credit counseling organization in Freehold, N.J.
“A lot of people have a twice-a-month mortgage payment,” she says. “In that case, you're making extra payments every year, which means you pay your mortgage off several years earlier and pay thousands of dollars less in interest … It might not be as dramatic, but the same thing happens with credit cards.”
Increased motivation: Micropayments can be effective not only financially, but also psychologically.
“I think of it as a diet,” Shore says. “When you start a diet, losing weight seems hopeless. You say, 'So what if I have another ice cream?' But if you do something that puts you on the right path, and you lose that first pound or two, that success builds on itself.”
Although micropayments offer tangible benefits, be careful about fees and restrictions, according to Dvorkin, who says some banks limit the number of checks you can write, or the number of online payments you can make within a month or a day.
“If people plan to make many small payments against a debt, I recommend that they check with the lender to see what their policy is,” Mayfield says. “Most will be OK with it, but it's best to make sure.”
|Issuers' policies on micropayments
|Issuer|| Policy on multiple payments per billing cycle
|American Express||Can make up to five payments per 24 hours using AmEx payment channels. Payments made via a third party (such as bill pay through your bank) are unlimited.|
|Bank of America||No restrictions.|
|Capital One||Can make one payment per 24 hours online, phone or voice response system combined. Customers can also have up to three scheduled payments pending. Payments by check have no restrictions.|
|Discover||No restrictions on online payments. For phone payments, customers must wait three days to between payments, if payment amount is more than $100.|
|GE Capital||Can make payment per account every 24 hours, across all payment channels. $10 fee for phone payments.|
|JP Morgan Chase||Can make online payments every three days.|
|US Bank||No restrictions.|
|Wells Fargo||No restrictions.|
|Policies subject to change by issuer.|
It's also important that you track your debt; even if your debt is shrinking, it will be hard to stay motivated unless you see it shrinking.
“You have to monitor it,” Shore says. “I recommend people make a list of all their debts, then look at it three months later and say, 'OK. I had this much debt and I made this many payments. How much has my debt gone down?' If it's not going down, it's not working for you.”
If the snowflake method is working, you can apply the same strategy to achieve other financial goals, such as saving — for a family vacation, a down payment on a home or retirement.
“Now that our debt is where we want it to be, we're using the same method to build up our emergency fund,” Mayfield says. “It's easy to dismiss small amounts of money as 'only' $10 or $25 or $50, but if you capture those amounts and either apply them to debt or add them to savings, they really will help you meet your financial goals.”