Last week, Tightening the Belt discussed snowflaking, or the idea of making small debt payments, often on a credit card balance, more than once a month. We gave examples, and here's why it works:
You'll save on interest: Most credit card companies assess interest daily on unpaid balances. So paying early saves weeks of interest charges.
You'll gain motivation: Making more payments forces you to think about your debts more often and gives you a more frequent thrill from seeing balances dwindle. If you want more motivation, focus the extra payments on debts smallest to largest. That allows you to pay off a few quickly, which can be a big emotional boost, like losing a few pounds in the first week of a diet. If you're more the mathematical type, pay off debts from the highest interest rate to lowest.
You'll improve your credit score: For those who carry balances, paying off debt more quickly improves their credit score more quickly. You might avoid late payments because you're more focused on the debt.
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Multiple payments also can help those who don't carry balances. Your credit scores are partly calculated on how much of your available credit you're using at any time. If you use $4,500 of a $5,000 available limit, you're penalized by credit-scoring models regardless of whether you pay the balance at month's end.
By making multiple payments, you reduce your credit-usage ratio, which accounts for 30 percent of your FICO score.