In short, no, it isn’t bad to have a zero balance on your credit card. Or, put another way, yes, it’s OK to have zero balance credit card and it can even help your credit score. After all, lenders like to see responsible borrowers, and if you have a credit card with a zero balance on it, you’re certainly not being reckless. However, too many credit cards with a zero balance could be a red flag to lenders; we’ll get into that in a moment.
In general, you can’t go “wrong,” per se, with having a zero balance on a credit card, but there are still several issues you should be aware of. And while a zero balance on a single credit card likely isn’t going to hurt your credit score, it’s likely not helping it either.
Statement balance versus credit card balance
First, let’s clarify what kind of zero balance we’re talking about. While you may understandably often try to get your credit card down to zero, it may be helpful to remember that your card can have money on it throughout the month, and you can still avoid paying interest. In other words, you want to be aware of the differences between a statement balance versus the credit card balance.
Your statement balance shows what you owed on your credit card when your last billing cycle ended. Your credit card balance, however, is whatever you owe on your credit card right now.
For example, if you have $4,000 balance on your credit card, but your statement balance shows $3,000, that means that you’ll want to at least pay $3,000 by the due date to avoid interest charges. That extra $1,000, plus whatever else you spend in the next cycle, will show up on your next statement and you’ll need to pay off that balance the following month before the due date.
There’s nothing wrong with paying more than your statement balance and getting your current credit card balance to zero – you’ll effectively pay off the entirety of one statement as well as part of the next statement before it ever posts. If you’re constantly hitting a zero balance on your credit card, that’s a good thing. Lenders like it, and you should, too. The less you owe, the less likely it is that one day you’ll say, “Geez, I can’t make a full payment this month.”
Importantly, you at least want to aim for being a “credit card deadbeat,” that is, paying off your statement balance in full every month so you avoid paying interest charges.
You can also always make multiple payments to your credit card throughout the month, rather than one big payment near the due date. This benefits you in a couple of ways: One, you’ll lessen the odds that you forget to pay your credit card by the due date and thus avoid a late payment fee; and, two, you’ll lower your credit utilization ratio. Lenders like to see cardholders borrowing no more than 30% of their available credit (keeping it under 10% is even better). Maintaining a low credit utilization ratio and never missing a payment are good for your credit score, so you may help yourself out with multiple payments throughout the month.
But the main thing again – try to at least pay off the statement balance in full every month.
How having a zero balance affects your credit score
A zero balance on your credit cards can affect your credit score in good ways and bad, but it’s not necessarily the balance itself that’s having the impact. It’s more about how you’re handling that balance.
When a zero balance helps your credit score
Generally, a zero balance can help your credit score if you’re consistently using your credit card and paying off the statement balance, at least, in full every month . Lenders see somebody who is using their credit cards responsibly, which means actually charging things to it and then paying for those purchases.
When a zero balance doesn’t help your credit score
A zero balance doesn’t help your credit score if you’re never using your credit card. If you have a zero balance because you simply never use it, your credit card may stop sending updates to the credit bureaus, and that inactive credit card could potentially lower your credit score over time. Lenders also sometimes get nervous if they see a cardholder with a lot of credit cards with a zero balance – and that they are never used.
The lender or its algorithm might essentially wonder, “OK, this borrower has a lot of available credit that they never use, and they still want more credit? What’s going on? Are they going to eventually use all of this available credit and not be able to pay it back?”
Bottom line: If you never use your credit cards, lenders have no idea if you’re actually a responsible borrower. It may not feel fair – because, really, what’s more responsible than not borrowing money? But lenders like to see evidence that you can borrow money and pay it back. If you have available credit that you never use, lenders don’t have that information – and that can ding your credit. So, yes, you could have a higher credit score if you’re consistently borrowing money and paying it back, than the person who has multiple credit cards with a lot of available credit but never uses them.
Can a credit card charge interest on a zero balance?
Generally, no, credit cards generally do not charge interest on a zero balance. But we’re using the word “generally” because there can be some weird exceptions. For instance, you could have a zero balance and be charged interest if in the last month or so, if you…
Took out a cash advance. So you took out a cash advance from an ATM with your card, used your card for other purchases throughout the month, and then paid off everything before your billing cycle even closed. But if you haven’t paid the interest on that cash advance yet, even though your balance may say zero, you’ll likely have some interest charges coming your way soon. That’s because cash advances don’t enjoy the same grace period – that is, the amount of time between the transaction and when interest starts accruing – as regular purchases do. It’s always very expensive to take out cash with a credit card; there are generally fees as well as interest that begins accruing immediately. Unless it’s an emergency, it’s better to not take out a cash advance.
Paid your credit card through a check by mail. Hard as it may be to believe, some people don’t have access to the internet or simply choose to mail in payments the old-fashioned way. You could send a check to your credit card and think to yourself, “OK, I now have a zero balance.” But, of course, that’s not the case if the check is still in the mail. If the credit card doesn’t get the check and can’t process it right away, there may be some days where you think you have a zero balance but really don’t – and so your next statement offers up some interest that you need to pay off.
Were charged interest LAST month Let’s say you messed up and didn’t pay your balance off in full one billing cycle. Chances are, the interest accruing on that balance is going to span two separate billing cycles. Therefore, you may pay the balance off in full as soon as you realize you made a mistake, but you may also still see an interest charge on the following statement even if you’ve gotten the balance down to zero.
So the bottomline is if you pay your credit card off every month in full, you should be able to avoid paying interest. And as a general rule, no, credit cards do not charge interest on a credit card that has a zero balance.
Is it better to have a zero balance or to close the card?
On the whole, it’s much better to have a zero balance and keep the card open. The reasons why you’d want to keep the zero balance and not close the card are as follows:
- Closing a card reduces your available credit and your credit utilization will take a hit. Your credit utilization is the amount of available credit that you have versus the debt you carry. While cardholders are often rightfully thinking about the amount of debt that they’re carrying versus the available credit that they have on one card, lenders also look at the available credit that you have across all of your credit cards or lines of credit, like a home equity line of credit. So if you close a credit card that has $2,000 available credit on it, suddenly you have $2,000 less available credit than you did, and if you’re carrying other debt on other credit cards, you may look like more of a credit risk. (Yes, it can be bizarre how this all works.)
- You could be hurting your credit by shortening your credit history. If you have a credit card that you’ve used responsibly for, say, 20 years, getting rid of that could hurt your credit score. Lenders like to see a long history of borrowing, and after awhile, suddenly that 20-year-old credit account is gone. That said, former credit card accounts will remain on your credit report for years to come, while you’re presumably using other credit cards and continuing to build a good credit history, and so it isn’t like the credit card will instantly disappear from your credit history.
So while it can hurt your credit a bit if you cancel a credit card, you also shouldn’t be terrified to do it either. If you have a credit card that, for instance, charges you an annual fee, and you simply can’t justify paying it any more, you’re probably better off getting rid of the card.
It’s just that generally speaking, it can be beneficial to have a number of credit cards, even if some of them do happen to have a zero balance.