When it comes to your credit scores, you’ll find no shortage of advice or alleged strategies on the best way to max out your numbers and improve your credit rating. You’ll find people who claim to know the perfect number of credit card accounts or the magical payment method you need to employ need to achieve credit score greatness.
One such strategy is to overpay your credit card to the point where you actually have a negative balance, or sur, rather than either a positive or a zero-dollar balance.
To call this “advice” is a stretch, but there are some that believe overpaying your credit card balance could potentially improve your credit scores. The idea is that, because a low balance-to-credit-limit ratio (or credit utilization) lifts your credit score, getting it even lower — into negative territory — might also help.
In reality, this is simply another credit myth. What’s worse, it’s poor financial advice at the same time.
Why the Strategy Cannot Work
Look, I’m all for working hard and using every reliable method available to improve your credit score. However, the “overpay” strategy can’t work.
Why? Because credit card issuers actually have no way to report a sur of funds in your account to the three credit reporting agencies (Equifax, TransUnion, and Experian). The best they can do would be to report a $0 balance on your account, but they can’t report negative numbers.
Therefore, even if your credit card statement reflects a sur, there’s no way for your credit reports to do the same – and those are what your credit scores are based on. There certainly is a benefit to paying your credit card balances down to $0, but you won’t derive any additional credit score benefit from an overpayment.
Having said that, overpaying your credit card bill can’t hurt your credit scores either. Because your card issuer has no way to let the credit reporting agencies know that your account has a sur of funds, there cannot be any impact on your credit scores whatsoever – positive or negative.
Paying more than you owe on a credit card bill is a bad idea for financial reasons, though. Credit cards accounts are not interest accruing accounts. There is zero financial benefit to paying more than you owe on a credit card account, because you receive no interest while the card issuer holds your money.
(It’s similar to getting a big income tax refund: There may be some psychological benefit to the sur, because you won’t owe anything and next month’s purchases might feel “free” — but in reality you’ve let someone else hold your money without receiving any interest. You’re far better off stashing the cash in a savings account.)
Since there’s no credit benefit and no financial benefit to an overpayment, there really is no reason to do it at all. The only reason you should ever have a sur on a credit card account is if you pay your bill in full and then return an item and receive a statement credit.
But How Do I Get My Money Back?
Relax, your money isn’t lost, and it’s not like you flushed it down the toilet. Whether you’ve created a sur of funds in your credit card account on purpose or due to returned merchandise, the good news is that you still have the right to those funds. Legally they still belong to you.
The easiest way to tap into those funds is usually by simply using the credit card account, which will result in the issuer applying the sur to any new balance. And if you don’t use the card for an extended period of time, your credit card issuer will send you a check repaying the sur.
According to the Truth in Lending Act (TILA), anytime a “credit balance in excess of $1 is created,” the card issuer must do the following: First, your account must be credited with the funds. Second, they must refund the remaining credit balance upon written request. Finally, they must make a “good faith effort” to refund any credit balance that has remained in your account for more than six months.