The amount of debt you’re carrying is 30% of your credit score—the second biggest factor after payment history—so your credit card balance obviously impacts your credit score. Having high balances can hurt your credit score because it raises your credit utilization—the ratio of your credit card balance to your credit limit.
Some people, however, believe that carrying a balance is necessary to build a good credit score. Others have concerns that a zero balance can harm their credit scores. Fortunately, it’s not true—a zero balance won’t bring down your credit score unless you have a zero balance because you haven’t been using your credit card. In that case, the credit card issuer may stop sending credit report updates for that account and may even close the credit card, both of which can affect your credit score.
Zero Balance and Your Credit Report
Having a zero balance on your credit card doesn’t mean that the zero balance will show up on your credit report or that the zero balance will be used to calculate your credit score. Here’s why: your credit card details arereported at various times throughout the calendar month (usually on the account statement closing date). Because of this, your credit card balance might not be $0 on the day your credit card issuer reports to the credit bureaus, depending on whether you've used your credit card after you paid the full balance.
For example, if you make a $100 purchaseon the 5th of the month and pay it in full on the 17th of the month, but your credit report was updated on the 12th of the month, your credit report won't show a zero balance. Instead, it will reflect the balance on the 12th.
Note
Unless your balance is always zero, your credit report will probably show balance higher than what you're currently carrying.
Fortunately, carrying a balance won't hurt your credit score as long as the balance you do have isn'ttoo high (above 30% of the credit limit). Higher credit card balances are considered riskier as creditors and lenders weigh whether you can handle an additional debt obligation.
Inactive Credit Cards
If you have a $0 balance for several months because you're not using your credit cards at all, your credit score could take a hit. When a credit card is inactive for several months or longer, your credit card issuer may stop sending account updates to the credit bureaus. Without a recent history of your borrowing showing on your credit report, potential creditors and lenders will have a harder time gauging whether you're a responsible borrower.
Making small periodic purchases and paying in full can keep your credit card balance at $0 and keep your account open and active for credit reporting.
Note
Having a $0 credit card balance isn't essential even for having a perfect credit score. According to FICO, consumers with a perfect FICO score of 850 have an average credit card balance of approximately $13,000 and a credit utilization of 4.1%.
Multiple Credit Cards
The average consumers carries four credit cards with an average balance of $6,194. If you're someone with multiple credit cards, each with a balance, paying off just one of those credit cards to zero can help boost your credit score.
The credit scoring calculation considers both your individual credit utilization on each of your credit cards and your overall credit utilization. Paying off one full balance brings down the credit utilization across all your credit cards, showing that you're not using the full amount of credit available to you.
Getting the Balance You Want To Report
If you’re applying for a major loan soon and want to reduce your balances to improve your chances of being approved, make a large lump sum payment to your credit card and don’t make any additional purchases for a few weeks. That way, you can be sure a low (or zero) balance shows up on your credit report and is reflected in your credit score.
Frequently Asked Questions (FAQs)
When should you close a credit card with a zero balance?
If you have a card with a zero balance, it might be tempting to close your account. Keep in mind your total available credit factors into your credit score. Closing your account will lower your available credit. That doesn't mean you shouldn't close the credit card, though. If you have a compelling reason for closing it, like wanting to avoid accumulating more debt or not liking the card's terms, it may be best to close the account.
What is a credit card balance transfer?
A credit card balance transfer is when you move the balance from one credit card to another. Some cards have introductory balance transfer offers. For example, they might offer 0% interest on balance transfers for 18 months. If you're paying more than 0%, it might be worth it to move the balance to the new card and pay it off before the interest rate increases, just be aware of the transaction fees collected on many balance transfers.
FAQs
No interest charges
Credit cards charge you interest only if you carry a balance from one month to the next. So this one's a no-brainer: Pay in full, and you won't have to deal with the double-digit interest rates that most cards charge.
How does paying off a credit card affect your credit score? ›
Consistently paying off your credit card on time every month is one step toward improving your credit scores. However, credit scores are calculated at different times, so if your score is calculated on a day you have a high balance, this could affect your score even if you pay off the balance in full the next day.
Does having a zero balance affect credit score? ›
A zero balance on credit card accounts does not hurt, but it certainly does not help increase a credit score either. Ask first if you really need to borrow as lenders are out to make a profit on the funds they lend you.
Does a 0% credit card affect credit score? ›
This is where charging large purchases to a 0% intro APR credit card could cause some trouble. Sure, you may not pay interest for a limited period. But you'll bring up your credit utilization, effectively bringing down your score. The damage isn't permanent, but it could affect your personal finances in the short term.
Do credit card companies hate when you pay in full? ›
While the term “deadbeat” generally carries a negative connotation, when it comes to the credit card industry, you should consider it a compliment. Card issuers refer to customers as deadbeats if they pay off their balance in full each month, avoiding interest charges and fees on their accounts.
What is the credit limit for zero balance account? ›
You have to make sure that your balance does not exceed Rs 50,000 or that the total credit in the account remains within Rs 1,00,000 or below it in a year. If you exceed this limit, no further transactions will be permitted.
Does credit utilization reset after payment? ›
Every dollar you pay off reduces your credit utilization ratio and your total debt, which makes it a win-win scenario. Plus, paying off your balances means no longer having to pay interest on those balances.
Why did my credit score drop 40 points after paying off debt? ›
Why credit scores can drop after paying off a loan. Credit scores are calculated using a specific formula and indicate how likely you are to pay back a loan on time. But while paying off debt is a good thing, it may lower your credit score if it changes your credit mix, credit utilization or average account age.
Should I pay off closed accounts on credit report? ›
While closing an account may seem like a good idea, it could negatively affect your credit score. You can limit the damage of a closed account by paying off the balance. This can help even if you have to do so over time.
What is the 15 3 rule? ›
You make one payment 15 days before your statement is due and another payment three days before the due date. By doing this, you can lower your overall credit utilization ratio, which can raise your credit score. Keeping a good credit score is important if you want to apply for new credit cards.
Having no credit is better than having bad credit, though both can hold you back. Bad credit shows potential lenders a negative track record of managing credit. Meanwhile, no credit means lenders can't tell how you'll handle repaying debts because you don't have much experience.
Is it better to close credit card accounts or leave open? ›
Canceling a credit card will cause a direct hit to your credit score, so more often than not, you'll want to keep the account open. Correctly managing an open, rarely-used account may require some extra attention, but the added effort will help your credit in the long run.
How long does it take to build a good credit score from zero? ›
Whatever your reason for wondering how long it takes to get a credit score, you can generally expect it to take about six months – and usually longer to get into the good-to-exceptional credit score range.
Should I pay off my 0% interest credit card? ›
It's never ideal to find yourself with a larger balance than you can handle at the end of a 0 percent intro APR period. The answer to this quandary is to pay your balance down as much as possible before the regular APR kicks in. That way, you'll minimize the interest you get charged.
Should I pay off my credit card in full or leave a small balance? ›
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.
Do you have to make payments on a credit card with no balance? ›
If it says zero payment do then you don't need to make a payment. Question is do you have a balance. If you have no balance this is likely because you had activity and paid it off before the bill, but of course you owe nothing so no minimum payment.
Will paying off your entire credit card balance in full every month hurt your score? ›
If you regularly use your credit card to make purchases but repay it in full, your credit score will most likely be better than if you carry the balance month to month. Your credit utilization ratio is another important factor that affects your credit score.
