You’ve paid off that credit card, and you are probably feeling pretty darn good about that. Or, you got that new card in the mail and stashed it away in your drawer. You are proud you left it there “just for emergencies,” and have never used it. Either way, how does carrying a credit card with a zero-balance affect your credit? Does a zero-balance credit card help or harm your credit score?
Generally speaking, having a zero-balance on any given card is a positive. A major factor of determining your credit score is your capacity. This is the amount of your overall credit that is available to use. The best way to have a positive credit rating is to keep your capacity above 50%. So any card that has a zero-balance, has 100% of its capacity available, which is a good thing!
However, it is best to use a card at least quarterly to keep it active. Active credit trade lines are considered in a credit score by credit agencies, even if they have a zero balance, as long as at least one purchase is made with the card quarterly. If not, it will drop off as an active or “available” trade line, which means you are losing the benefit of the high capacity. Zero balances reflect that you have 100% of your capacity available on a particular card as long as the trade line remains active.
In addition to handling zero-balance cards as mentioned above, how else can you improve your credit score?
Your credit score is comprised of five main factors: payment history (30%), amount owed (35%), length of credit history (15%), new credit (10%) and credit mix (10%).
As you can see, your “amount owed” is the biggest factor. The best way to improve a credit score is to pay down open-ended credit lines when the balance due is more than 50% of the limit. Other ways to improve your score include:
- Get a copy of your credit reports and dispute any errors.
- Always make more than your minimum payment. Pay attention to the box on your statement that says the balance and the number of years it will take to pay it off if you make just the minimum vs the number of years if you pay X. Always try to pay “X” because the savings in interest could be significant.
- If you are having trouble paying your bills on time, contact your creditors instead of missing payments. Almost all offer hardship programs, especially now during the pandemic.
- Consider professional credit counseling if your debt is out of control.
Managing your personal credit can often feel challenging. That’s why making a plan to manage your payments and balances can help.