When is it a good idea to pay more than your monthly credit card balance? When does that help, when is that not worth doing / doesn't do anything? Why is that a good idea? Does that help your credit in any way? If so, how? In the Money Smart Podcast (from the FDIC), they said it was a good idea, but I did not walk away with clear answers to the above questions.
When you are paying your credit card each month you are typically given 4 options:
- Your current balance: this is generally the highest number because it is the balance as of today.
- Your statement balance. This is generally the 2nd highest number because it was your balance of the account the last time the bill closed and the statement was generated. Pay this by the due date to avoid interest.
- Your minimum payment. If you pay this by the due date you will avoid a late fee, but you still will owe interest.
- Specify an amount.
So why would somebody pay the first number, if it isn't required and paying the statement balance would avoid interest and penalties?
If they are close to the limit, then paying the current balance will bring the balance down to zero. If they know they will have a big item or series of items they will be putting on the card in the next few days this can make sure they don't hit the limit. People do this just before their vacation, they do this if they know they will be putting their kid braces, or their annual life insurance bill on the card.
Some people actually go even further and will even overpay the current balance amount. In some cases that will give them a temporary boost to the biggest item they can put on the card. Not all cards will allow this. It also isn't a permanent thing. If the card is seldom used and you don't use the excess amount they will eventually send you a check to bring the amount back to zero.
I have never over paid. In the one case where I considered it, I requested via the website for an increase in the limit and it was granted in minutes.
Some people will pay more often than monthly to keep their utilization number down. I haven't ever done this because if the high utilization is a infrequent occurrence, then the hit to your credit score isn't sticky and the numbers will bounce back the next month. If you are always going over 30% utilization, and you aren't having problems paying your bills, then ask for a higher limit. That will give you the room you need.
There are three typical levels of payment
- Minimum payment: this you have to pay or your account is in default which triggers hefty fines, a ding on your credit report and potentially collection. You will still pay an absurdly high amount of interest (in most cases).
- Monthly balance: this is by far the best option since it typically means that you pay zero interest and use the card as a means of payment and NOT as a means for credit
- More than the monthly balance: Generally that doesn't do anything useful and many credit card companies will actual refund any overpayment. In fact, you are just giving the credit card company a free loan.
There are a few exceptions where overpayment or pre-funding can make sense:
- If you are planning purchase(s) that may exceed the credit limit on your card. Example: you want to put a large purchase on a card with high cash back but low credit limit.
- If you are planning to use the card for cash advances (e.g. while travelling abroad). It's a very good idea to pre-pay the anticipated amount with a healthy margin on top, so the cash withdrawal doesn't trigger immediate interest accrual.
- If you have used the card for cash advances. This is a particularly nasty one. Let's say you have a month with $100 cash advance and $900 other purchases. Your monthly bill is maybe $1010 which includes $10 interest on cash advance. So you pay $1010 at the due date, assuming that you have paid off everything on time. Wrong! Cash advances accrue interest on a daily basis, so by the day your payment has arrived, there is another $1 or so of interest on your balance. That means you have NOT fully paid of your entire balance, and you get hit by a full interest charge for the $900 of other purchases as well. So the only way to fully pay off a cash advance, is to overpay your monthly bill by a sufficient amount. This sounds bizarre but did actually happen to me and I had to threaten to close the account (which I was VERY willing to do) before they they waived the interest charge.
One more thing: you can put money on your credit card whenever you want to you. You don't have to wait for a certain date or combine it with your regular monthly payment.