I have a customer who prepays their orders. They sent a prepayment for $.60 less than their order, so we left $.60 on their account. Then, they mistakenly paid again, but in full. The $.60 is applied to the previous invoice, but the rest of the payment is currently unapplied. How do I turn the rest of the payment into a credit memo?

their payment is essentially a credit memo which is just another form of payment. this payment should stay with the customer record and applied next time invoice is created, just do not send the invoice out for this customer; or you can issue a refund now and be done with it

Yeah, the only issue is that my customer is asking for a credit memo... I ended up creating a dummy one in our sandbox.

You could always Refund it to a holding account and then issue a credit memo against that holding account, but that's silly.