Everyone wants the best credit score possible, but it's not always easy to understand how to do that. One area that often trips up many people is whether it's bad to have a zero balance on a credit card.
The short answer is no, it's not bad. A zero balance on one credit card won't hurt your credit score and can actually help it by lowering your debt-to-credit ratio. Also known as a credit utilization rate, this factor can have a significant impact on your credit score and experts recommend keeping it below 30% across all your loan products.
Why is that? Keep reading for everything you need to know about zero balance credit cards and your credit score.
Is it bad to have a lot of credit cards with zero balance?
Having a lot of credit cards with a zero balance can both hurt your credit score and make you a less attractive new applicant should you want to apply for a new card in the future.
When we're talking about a "zero balance," though, it's important to keep in mind that you definitely WANT a zero balance when it comes to your statement balance – you want to pay off a statement balance every billing cycle in order to avoid paying interest. That doesn't mean, however, that you never use the card; rather, you use the card, so you show regular activity, but you pay it off in full every cycle.
The real danger comes in opening multiple cards and then going too long with showing any activity on them. In that case, your issuer might determine the card is dormant and close it because of inactivity. If that happens, it could affect your credit in two different ways.
A closed account can lower your overall available credit which could increase your credit utilization ratio if you are carrying a balance on another card. Or, if it's the oldest account on your credit report, it could shorten your active credit history which can also have a negative impact.
So don't feel as though you need to carry a balance but do use your cards occasionally to keep them active and open.
Is it bad to have your credit balance at zero?
How about if all your credit balances are at zero? Is that a problem?
Again, on its own, this isn't a problem. However, to maximize your credit score, you want to be able to show creditors that you can responsibly use your accounts. That means creditors like to see people making purchases and paying them off.
To do this, make small purchases throughout the month and then pay them off before interest starts accruing. This can help show lenders that you are able to use your credit wisely.
How having a zero balance affects your credit score
People often ask: Is a zero balance on a credit card bad?
But what they are really asking is: Does having credit cards with a zero balance hurt your credit score?
As we mentioned before, zero balances won't negatively impact your credit score unless they result in an account being closed. Otherwise, a zero balance can actually boost your credit score by improving your credit utilization.
What is credit utilization?
Credit utilization refers to how much of your available credit you're using. It's also sometimes called your debt-to-credit ratio.
Let's say you have a $1,000 credit limit on your credit card, and you've charged $1,000 in purchases. That gives you a credit utilization rate of 100%. If you don't have anything charged to the account, your credit utilization rate is 0%.
As for how having a zero balance affects your credit score, a good credit utilization rate can increase your credit score significantly. In fact, the amounts you owe make up 30% of your FICO credit score, and VantageScore says total credit usage, balance and available credit are extremely influential in its scores. Learn more about Fico vs VantageScore.
A credit utilization rate below 30% is best, and below 10% is even better. That means on a $1,000 credit line, you shouldn't carry a balance more than $300. That isn't to say you can't charge more than that - just be sure to pay it off before the end of the month.
Creditors will often look at credit utilization rates for individual accounts as well as the total of all your available credit. If you are carrying a balance on some of your cards, keeping a zero balance on others can help improve your overall ratio.
How to boost your credit score
Improving your credit score is about more than your credit utilization rate though. Here are the factors that make up a FICO score:
- Payment history - 35%
- Credit utilization - 30%
- Length of credit history - 15%
- Credit mix - 10%
- New credit - 10%
Making timely payments and keeping balances low are two ways to increase a credit score. Meanwhile, credit mix refers to the different type of accounts you may have - such as credit cards, auto loans or a mortgage. As for new credit, a flurry of new accounts has the possibility of dropping your credit score by a few points.
Is it better to close a credit card or leave it open with a zero balance?
The answer is definitely to leave it open, unless it charges an annual fee or there is some other compelling reason to close it. Otherwise, closing it has the potential to reduce your credit score if it shortens the length of your credit history or lowers the percentage of credit available to you. If the card has an annual fee, you could always consider making a product change, that is switching to a no-annual-fee version of that card if one is available, instead.