Reader Question: Does overpaying hurt me with card issuers?

Apr 10, 2020

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Editor’s note: This article is part of a new weekly column to answer your credit card questions. If you would like to ask us a question, tweet us at @thepointsguy, message us on Facebook or email us at info@thepointsguy.com
Here at TPG we try to make the best recommendations for credit cards- whatever your situation. Whether you’re a travel card guru or a college student seeking to open their first account, we’re here to help you make the best of your situation. But what happens if you already have credit cards, use them and then pay- no, overpay- them when your statement closes?

I always pay my cards in full every month and keep my utilization under 5%. Usually, I pay all charges, including pending, about 2 days before each statement closes so that each card would close at zero.

Because of this strategy, I will sometimes overpay if pending charges are close to the closing date. This sometimes results in having a credit at closing.

Since my utilization is low on each card and my limits are relatively high, it shouldn’t read as a back channel limit increase, but I’ve heard horror stories about people who’ve overpaid their cards.

Vaughn (from Seattle)

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Why you shouldn’t overpay your credit cards

Fortunately for Vaughn, overpaying your credit card doesn’t hurt your credit score. Credit card companies have no way of indicating a negative balance on your card, so your surplus balance will instead be shown as $0. Still, you should avoid overpaying your card as much as possible. Why? Because every penny you pay in excess of your balance faces an opportunity cost. Credit card accounts don’t bear interest on your surplus payment, so this is worse than, say, simply stashing those funds in a low-yield savings account.

There’s another reason, though, that overpaying isn’t a good idea. While banks are mandated to make a good-faith effort to refund your money if your card goes unused for six months, there’s no guarantee that you’ll receive it. If you’re no longer at the same mailing address, it’s very possible that you’ll miss the money. Once the effort is made, credit card issuers are then absolved of their duties and that money can be lost.

You can always request a check from the bank before the six months, though you’ll often have to call or email in order to make the request.

What is the right credit utilization?

It can be difficult finding the right amount of credit you should be using each month. Vaughn states that he likes to keep his credit card utilization under 5%, and this is a good amount. While some experts say that you should be wary of utilizing more than 30% of your credit at any given time, there is no hard and fast rule for how much you should maintain on a monthly basis.

One thing to be aware of, however, is the danger of keeping your utilization at a flat 0% at all times. While this may make sense in theory- as in, “I always pay the banks on time and never owe money at statement close.”- in reality, it could damage your credit score. If you always pay all your balances before your statement closes, other banks will it simply looks as if you’ve never used your card at all. Of course, the goal of a credit score is to establish that you’re a reliable borrower, and one who never borrows appears to be a much riskier choice than someone who regularly charges and then makes payments when they’re due.

Related Reading: 6 things to do to improve your credit

Bottom line

While it won’t hurt you or your credit score to overpay your credit card, you shouldn’t do it. The money you’re giving the bank can instead be used for much better things, even something as simple as a savings account. It can also be difficult to recoup that money if you don’t end up using it or the card. Overall, it’s just a better idea to pay what’s due and keep the rest in your pocket.

Featured photo by Orli Friedman/The Points Guy.

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Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

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