Saturday, March 3, 2012

The Small Balance Credit

Recently, I decided to forgo maximizing my rewards (since this usually amounted to getting an extra quarter each month) to using each and every one of my cards at least once a month.  This way, I can hopefully start focusing on building a better credit score which should benefit me in the future after graduating.  I raise my credit score by charging a small balance on each one and keep these balances low relative to my credit limit.  This helps show credit companies that I know how to manage my credit effectively with low risk which in turn raises my credit score.  This often results in balances of maybe a couple dollars since I just buy one thing from the grocery store or a fast food restaurant.  Amazingly, after just one month of starting this, I came across a very interesting phenomenon.

This past week I found out about the existence of a "Small Balance Credit" which has highly raised my opinion of my Discover card.  I had a $2.00 balance on my Discover card and when my balance came out, it said I had a $0 balance.  Looking closer at my statement, it said that there was a $2 "Small Balance Credit" under payments.  I thought maybe I paid it from a bank account and forgot about it, but nope.  Looking online, apparently, it is quite a common feature with certain credit cards.  Some online forums have been discussing that some credit issuers give small balance credits because it is more costly for them to process a payment when the balance is small.  According to one blog, Chase, Discover, and Wells Fargo will give a small balance credit for balances of $1.99 or less (although Discover forgave $2.00 exactly for mine), and Capital One will forgive balances of $0.99 or less.  Discover seems to be the most famous for this feature though.  I called in to double check if there was any negative consequences for getting this small amount of money for free, and apparently there aren't.

I personally think this is an amazing discovery.  Obviously it would not be good to abuse it, and I would definitely not recommend anyone to get $20 credit cards to get $40 a month for free, but I think this will be quite helpful for me to continue to maximize the returns on my cards.  I probably won't include these when looking at my credit card rewards, since they will skew the picture by essentially being 100% cash back.  And although this has raised my opinion of Discover, I wouldn't say you should get their credit card just because of this feature.  But if you do have a card sitting somewhere, it might be a good idea to use it and get a free bagel or coffee every month.  These small freebies certainly add up, and this one rewards behaviors that will improve your credit score anyway.  It might change in the future, especially if word spreads and people start running small balances every month, but for now, I think I'll enjoy it while I can.

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