What is a Zero Balance Card?
The term “zero balance card” refers to a credit card with no outstanding debt balance. Credit card users can maintain zero-balance cards by paying off their balances at the end of each billing cycle or by simply not using them. In either case, supporting zero-balance cards can benefit users by helping them improve their credit scores.
Understanding
Many credit card users rely on their credit cards to finance everyday transactions such as groceries, gasoline, or discretionary purchases. According to a survey by Clever, roughly 53% of borrowers pay off their total outstanding balances each month.
Clever. “New Report: How Credit Card Debt Impacts the Average American.” Accessed March 18, 2021.
This method of using credit cards can benefit users since it allows them to enjoy benefits such as cash-back incentives and rewards programs without 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 due balance becomes manageable relative to their credit limit, it may help the borrower’s credit score. On the other hand, maintaining a relatively low debt balance close 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, 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 the passage of the Credit CARD Act in 2009, 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 decrease their overall 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.
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, keeping the zero balance card helps reduce your overall percentage. After all, if you closed the card, your combined balance would still be $3,000, but your credit limit would drop to only $7,000. As a result, your new utilization ratio would rise to over 40%.
