What Is a Zero Balance Card?
Let me explain what a zero balance card is—it's simply a credit card with no outstanding debt balance. You can keep your card at zero balance by paying off everything you owe at the end of each billing cycle, or just by not using the card at all. Either way, this practice benefits you as a credit card user because it helps boost your credit score.
Key Takeaways
- A zero balance card is a credit card with no outstanding balance.
- You can maintain such cards by paying off your full balance each month, or by refraining from making any purchases on them.
- Maintaining zero balance cards can help improve your credit scores by reducing your overall credit utilization ratio.
Understanding Zero Balance Cards
Many of you rely on credit cards for everyday buys like groceries, gas, or other purchases. A survey by Clever shows that about 53% of borrowers pay off their full balances each month.
This approach is beneficial because it lets you enjoy perks like cash-back and rewards without paying any interest. Credit card companies check your balance at the end of each month, so if you pay it off, your card shows zero balance—making it a zero balance card.
Now, for the other 47% who carry balances month to month, that debt shows up on your credit report. If it's too high compared to your credit limit, it can hurt your credit score. But keeping a low balance relative to your limit can actually help your score.
If high interest rates are making it hard for you to keep a zero balance on your current card, consider transferring your balance to a card with better terms.
Real World Example of a Zero Balance Card
In the past, some credit card companies charged inactivity fees if you didn't use your card regularly, but the Credit CARD Act of 2009 made that illegal, though they can still charge annual fees.
If your zero balance card has no annual fee, keeping it open benefits you by lowering your overall credit utilization. For instance, suppose you have three cards: one zero balance with a $5,000 limit; another with $1,000 balance on a $4,000 limit; and a third with $2,000 balance on a $3,000 limit.
Your total limit is $12,000, total balance $3,000, so utilization is 25%. If you close the zero balance card, your limit drops to $7,000, balance stays $3,000, and utilization jumps to over 40%. This shows why keeping that zero balance card open is useful.
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