When you borrow the money you can’t afford to borrow today, you rob your future self of desperately needed funds when you get your next paycheck. There are many circumstances in life that are beyond our control, however, we can learn to improve our personal finances. But for some people, a perpetual debt cycle mindset invades their thinking and becomes like an incurable mental virus. It is sometimes known as a compulsive debtor or debt quagmire syndrome. It’s the idea that the only way to generate income is to create more debt, which leaves you in a financial hole to make more money, so you take on more debt. This dependence on debt generation as a way to make money is why so many Americans are drowning in credit card debt. But making regular micropayments for credit card debt could be a solution to the problem.
Micropayments for credit card debt is the personal finance strategy of making regular, small payments on a consistent basis. You can make $1, $2, $7, or $15 micropayments for credit card debt every day or every three days, for example.
Making consistent micropayments for credit card debt is a strategic financial method to reduce debt, lower your interest rate, improve your credit score and credit history, and reduce stress.
When I fully explain the benefits of making micropayments for credit card debt, you may ask yourself why you haven’t tried it.
To start with, let’s first examine the credit card debt problem in America.
Credit Card Debt in America
Americans collectively owe over $14.5 trillion in all kinds of debt. The typical American household owes over $148,000 in various debts.
And the average American owes over $7,100 in credit card debt.
Americans collectively owe over $421 billion in credit card debt.
Unmanageable credit card debt is trapping millions of Americans in compulsive debt quagmires that they never escape. So, they take on more debt to pay off current debt, creating more debt for the future.
When you take on ever-increasing amounts of debt, you increase your debt-to-income ratio. This basically means that more of your income becomes dedicated to paying bills. Most credit card companies will reject your application if you have a DTI ratio of 30% or more.
What that basically means is that over 30% of your income is being used to pay off your debt. Now imagine that 40% or 50% of your income is being used to pay off debt.
You won’t be able to save any money. And if you keep assuming more debt to pay off debt, your DTI will only increase.
The greater your credit card debt, the more your interest rate will increase. Since the average credit card interest rate is 16.30%, that will only add you your debt problems.
And you can see your credit score drop.
FICO revamped its credit scoring metrics in early 2020. If you continually maintain outstanding balances and pay credit card debt late, your credit score could drop by 20 points. Or more.
One solution to this problem could be to make micropayments for credit card debt.
Micropayments for Credit Card Debt
Making assumptions is a practice that gets us into a lot of trouble in life. Most people assume that they must only make a credit card payment on the specific day their outstanding balance is due.
Having such a mindset leaves no room for error. If you miss your payment or pay less than the full amount, you can incur penalty fees on top of what you owe. And you risk higher interest rates later on.
You can make as many credit card payments as you wish. You can make $2 credit card payments every day for a month. Or you can make multiple small payments against your credit card bill in a day.
The average credit card bill per month is about $123. If you made $4 payments four times a week, you can add $64 to your credit bill in a month. Then you can add $60 from a paycheck near the due date to pay the bill in full.
This is the strategy behind micropayments. Pay what you can as often as you can against your credit card bill, so your debt doesn’t get out of hand.
How you employ the strategy is up to you relative to how much money you have. But you don’t need a lot of money to make a micropayment.
And making $2 or $3 micropayments every two or three days will help your credit history and score a lot better than missing big payments all the time.
Here are the benefits of making micropayments for credit card debt.
Pay Off Credit Card Debt Quicker
The compulsive debtor mindset tells us to carry over credit card balances from one month to the next. And we usually do this while not paying up those balances in full by making minimum or partial payments.
By making micropayments for credit card debt, you can pay your debt faster, albeit it incrementally. Or you can combine small incremental payments with a larger payment as well.
Lower Interest Rates
Your credit card interest rate is calculated based in part on your outstanding daily, weekly, and monthly balances.
When you create a record of regular payments, even if they are small payments, that will incrementally lower your interest rate.
Improved Credit Score
If you spend years missing credit card payments, you will create a record on your credit history. And that negative data will lower your score and present yourself as a risk to potential future lenders.
By making multiple and regular small payments, you will avoid late payments. Your credit history will show that you are reliable in paying off debts, even with smaller payments.
You will also incrementally lower your credit utilization ratio. Credit card scoring bureaus and issuers prefer cardholders who use less than 30% of their available credit limit.
And making micropayments for credit card debt will incrementally improve your credit score.
Develop a Budget
Making micropayments for credit card debt should only be one part of an overall personal finance strategy to get out of debt.
Make a budget so you can prioritize bills and assess need over want when it comes to your expenses.
Save as much money as you can – saving $1 a day is better than spending all of your money as soon as you earn it.
Devise strategies to realistically earn more money.
Consult a financial advisor to determine how you can realistically pay off all of your credit card debt as soon as possible.
Read More
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IN A DEBT QUAGMIRE? DON’T DO THIS
WHAT’S TO DO NEXT AFTER PAYING OFF ALL DEBT?
HOW TO AVOID SCHOOL LUNCH DEBT
IS IT BETTER TO FILE BANKRUPTCY OR DO DEBT CONSOLIDATION?
Editors note: If you’re reading this because you’re considering a debt consolidation company, don’t do it – work hard and get your debts paid off instead.
Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.