The term “zero balance card” refers to a credit card with no outstanding balance. Credit card users can maintain zero balance cards either by paying off their full balances at the end of each billing cycle, or by simply not using their cards. In either case, maintaining zero balance cards can benefit credit card users by helping to improve their credit score.
Key Takeaways
- A zero balance card is a credit card with no outstanding balance.
- Customers can maintain such cards by paying off their full balance each month, or by simply refraining from making any purchases.
- Maintaining zero balance cards can help improve customers’ credit scores by reducing their overall credit utilization ratio.
The Perks of Zero Balance Cards
Many credit card users rely on their credit cards to finance everyday transactions such as groceries, gasoline, or various discretionary purchases. According to a survey, roughly 53% of borrowers pay off their full outstanding balances each month.
This method of using credit cards can be very beneficial to the user, since it allows them to enjoy benefits such as cash-back incentives and rewards programs without actually incurring any interest on the debts. Since credit card companies typically calculate their customers’ outstanding debts at the end of each month, these customers’ credit cards would show an outstanding balance of zero—making them zero balance cards.
But what about the roughly 47% of customers who do not pay off their credit card balances each month? These credit card users will show a steady balance of outstanding debt from one month to the next, the size of which will be recorded on their credit report. If the outstanding balance becomes too large relative to their credit limit, then this may have a negative effect on the borrower’s credit score. On the other hand, maintaining a relatively low balance of debt compared to their credit limit can help improve a borrower’s credit score.
If you’re having trouble maintaining an outstanding balance of zero on your current card due to a high interest rate, you might consider a balance transfer to a better card.
Real-World Example of a Zero Balance Card
In the past, some credit card companies would charge their customers inactivity fees if they failed to make regular purchases using their credit cards. This practice was made illegal through legislation, although credit card companies are still permitted to charge annual fees on their cards.
Assuming a zero balance card does not have an annual fee, keeping the account open can benefit the cardholder by helping to decrease their overall level of credit utilization. For example, suppose you are the holder of three credit cards: one is a zero balance card with a credit limit of $5,000; the second has a $1,000 balance with a credit limit of $4,000; and the third has a $2,000 balance with a credit limit of $3,000.
In total, your combined credit limit is $12,000, and your combined balance is $3,000, giving you an overall utilization ratio of 25%. From this example, we can plainly see that keeping the zero balance card is helpful in reducing your overall ratio. If you closed the card, your combined balance would still be $3,000, but your credit limit would drop to $7,000. As a result, your new utilization ratio would rise to over 40%.
Related Terms: credit card, credit score, credit utilization ratio, cash-back incentives, rewards programs.
References
- Clever. “New Report: How Credit Card Debt Impacts the Average American”.
- U.S. Congress. “H.R.627 - Credit CARD Act of 2009”.
