Is it Bad To Have A Zero Balance Credit Cards?: Impact on Credit Scores (2024)

Few numbers have a financial impact like the almighty credit score. Despite the importance of credit scores for securing mortgages or car loans, how rating agencies decide the rating for each person remains a mystery to most individuals. We’ll talk about how having credit cards with a zero balance impacts your credit score and the history and evolution of credit and credit scores. Knowing the strategy of credit agencies and the lenders they serve will help borrowers make solid financial decisions and avoid the pitfalls surrounding credit.

Lenders want to know both how reliable and profitable you are. If you have a zero balance on credit accounts, you show you have paid back your borrowed money. A zero balance won't harm or help your credit. To find out how we got here, we have to understand what credit is and the history of credit agencies. Let’s dig in.

5,000 Years of Credit

Borrowing has become a part of life in the modern world, so much so that it's easy to forget that credit isn't a natural concept for humans. It’s a relatively new concept for human cultures.

As civilization started to spread across the ancient world 5,000 years ago, so did the practice of debt and credit. People specialized as part of a civilization. One person might be a farmer, the other a weaver, each focused on their production. The problem became if a weaver needed wheat to eat, but the farmer did not need a shirt from the weaver. What were they supposed to do to make a fair trade?

No, they did not barter like many people falsely believe. Instead, they implemented a quick and easy solution. The farmer would give wheat to the weaver and say, “You owe me one.” The weaver understood that the farmer would ask him for a favour when he needed it.

“I owe you” is the basic foundation of credit. We all have said this phrase when borrowing or when we are in need now but don't have the funds or appropriate payment. What has changed since the farmer and weaver scenario is the addition of interest. When we borrow money from banks, the bank expects us to repay the amount owed plus extra to cover the expenses during the borrowing time. In short, the borrower must pay the lender for the time they borrowed money through interest.

This system works well until the borrower fails to pay back the loan. That is where the concept of creditworthiness and score comes in.

A Quick History of the Credit Score

What exactly is a credit score? The question is so simple that many refuse to ask about the importance of the three-digit score. In short, a credit score is a prediction issued by a credit agency on how likely a person is to repay a loan.

Agencies in the United States and Canada focused on the creditworthiness of various railroad companies that boomed during the westward expansion of both countries. The problem was that the British Empire and other parts of Europe had the most wealth. Scams from fake railroad companies abounded as North America spread further west, discovering more and more natural resources that could be shipped back east and across the Atlantic to Europe.

Consequently, businesses emerged that could provide investors with high-quality information on the legitimacy of these US companies. Many of these agencies are still recognizable 120 years later. Henry Poor’s publishing company, which focused on railroads and new canals, is an example. The Standard and Poors (S&P 500) Index in the United States Stock market still holds the name.

Some sharp business owners realized they could take the business credit rating system and apply it to individual people. One of the first firms was Dun and Bradstreet, whose agents gathered information on people looking to borrow from banks. Unfortunately, many of these firms often collected very personal information and were subject to controversy over much of the 20th century.

The Atlanta Retail Credit Company gathered files on millions of Americans, including social status and information about their sexual lives. According to a 1968 New York Times article, people lashed out against the rating agency when it digitized its records. After congressional hearings in the 1970s, the Retail Credit Company renamed itself Equifax, and three-credit numbers were created.

The goal of the credit agencies in Canada and the United States remains the same: to provide lenders with a prediction for how likely a person is to repay loans via a credit score. In addition, a credit score signals to the lender how profitable a borrower maybe. While collecting private details is banned in Canada and the United States, credit agencies keep detailed records of how many credit accounts a person has and how well they repay their loans.

The Profit Motive

To understand credit scores, borrowers need to understand the motivation behind corporations issuing credit scores: profit.

Lenders want to know if borrowers will repay the original loan and how much profit they can make from the borrower. Interest rates are the way a lender makes a profit on a loan. The bank wants to avoid someone that will default on a loan because it becomes costly to collect the loan or negotiate with the borrower for lower payments. Sometimes, the process ends up in court. Again, this is costly for lenders, so they try to avoid those with a bad payment history.

With credit scores, lenders identify those borrowing large sums and making those payments without fail. Many people in the modern world treat debt so naturally that they don't mind paying fees and interest rates on borrowed money. These borrowers are a gold mine for lenders as they often charge big spenders high-interest rates plus additional fees, such as monthly membership charges or administration fees during the borrowing process. Canadian law regulates many interest rates and fees under fair lending practices, but fees and high-interest rates exist. Lenders can use credit scores to identify these profitable individuals and advertise to them directly.

Keeping A Zero Balance On Credit Cards

With the foundational knowledge of credit, credit scores, and what motivates lenders, we can finally address what happens when a borrower keeps a zero balance on credit cards.

For a credit agency to predict the borrower’s ability to repay in the future, it needs to see a history of how well the borrower repaid loans in the past.

If you have never borrowed before, how do you promise that you can repay in the future? It's not an easy chicken or egg problem to solve - credit companies are reluctant to lend to people with no borrowing history.

The solution for both borrowers and lenders is credit cards. Most credit card companies allow a borrower with no credit history to open an account. They limit how much you can borrow and charge a high-interest rate if you don't pay off the card monthly. Regardless, it’s a first, small, and positive step for most borrowers.

Some people realize they can open a credit account and assume that if they don't use it, they can build their credit score and history without the risk of having to pay interest or fees. However, credit score agencies are more clever than that. They want to see your borrowing habits and how much of a balance you keep, how much interest you can pay, and of course, if you fail to pay any bill.

Opening accounts with a credit card company won't hurt your credit score, but having zero balances does not allow you to prove to lenders that you're creditworthy and will repay a loan.

Lenders want to ensure you pay them - and with interest. That is why a credit score is often at its best when the borrower is paying both the principal and interest rates on a timely and regular basis. Zero balances on credit accounts are not harmful or helpful, as they won't help you, as a borrower, to prove you're creditworthy to lenders.

Is It Bad to Have a Zero Balance on Credit Cards?

To sum things up, the answer is no, it isn't bad to have a zero balance on your credit cards. In fact, having a zero balance or close-to-zero balance on your credit cards can be beneficial in many ways. A few of the most important benefits are: reducing debt, improving one's credit score and avoiding late payments and/or interest charges. Keeping a zero balance on your credit cards might also help you avoid overspending as well as make budgeting easier since all transactions will be visible at once.

What Happens If I Have Too Many Credit Cards with a Zero Balance?

Having more accounts open makes it easier to get a credit score, which improves your appearance to lenders. Credit agencies like to see that you have more than five credit accounts open at any time. However, multiple accounts may be difficult to track, resulting in missed payments that lower your credit score. You must decide what you can manage and what will make you appear most desirable.

Having too many cards with a zero balance will not improve your credit score. In fact, it can actually hurt it. Credit agencies look for diversity in accounts, such as a mix of revolving and installment loans, to assess risk. A lack of use on many cards signals that you are not actively managing your finances or taking advantage of any potential benefits from the cards.

Why Shouldn’t You Keep Your Credit Card Balance at Zero?

First of all, when you don’t owe any money on your credit cards each month it becomes difficult to establish good credit history. Without actively using and paying off your cards regularly, lenders won’t be able to assess whether or not you would be a responsible borrower. This can make it difficult to secure loans or other credit in the future.

Additionally, when you don’t owe anything on your cards each month, you won’t be building up any rewards points or cashback for purchases made with those cards. Most issuers provide one-time bonuses and ongoing incentives for cardholders who use their cards frequently and pay off any balances at the end of the billing cycle. These rewards can be used to offset expenses like travel costs, groceries, and more.

Finally, having no balance on your credit cards can also mean that you are missing out on taking advantage of 0% interest rate promotions. Many card issuers offer promotional periods that can help you to save money on purchases made during these times. If you don’t have any balance on your cards, you won’t be able to take advantage of any offers from the issuer.

While having a zero balance on your credit cards may seem like a desirable goal, it is important to consider the potential drawbacks before making this decision. Building up credit history and taking advantage of rewards programs are important considerations when determining how best to use your cards each month.

A Note on Negative Balances

You can also have negative balances on your credit card. A negative balance indicates that you have received a cash-back incentive from your credit card company, overpaid your bill, or returned something purchased with a credit card. Negative credit is better than a prolonged zero-dollar balance, but you should spend money to take advantage of your savings.

Ask Yourself If You Need To Borrow In The First Place

The best tip is to ask yourself if you need to borrow in the first place. The best way to build financial health is to avoid taking on debt. Lenders are looking to make a profit from you as a borrower. Nothing is wrong with this, but it's important to realize that paying interest adds up quickly over the years. Money paid in interest is money that cannot be used for savings.

Borrowing is useful at certain times in life and is a perfectly usable option, but it often becomes a crutch and leads borrowers down an increasingly dangerous circle of debt, interest payments, lack of savings, and adding more debt.

If you borrow, only borrow what you need, and ensure you pay it back promptly. If you do this, you improve your current credit score and maintain a great credit score in the future.

Is it Bad To Have A Zero Balance Credit Cards?: Impact on Credit Scores (2024)


Is it Bad To Have A Zero Balance Credit Cards?: Impact on Credit Scores? ›

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 having credit cards with zero balance hurt your credit score? ›

An active card can help your credit, but a zero balance is best for your score. July 5, 2023, at 9:00 a.m. Carrying a balance of any amount means you owe interest.

Are 0 credit cards bad for credit score? ›

Carrying high balances on a 0 percent intro APR card might cause short-term damage to your credit score — but carrying those balances after the introductory APR expires creates a long-term problem. Once your zero-interest period ends, any unpaid balances will begin to accrue interest at the regular interest rate.

Does zero balance account affect credit score? ›

“Having a zero balance helps to lower your overall utilization rate; however, if you leave a card with a zero balance for too long, the issuer may close your account, which would negatively affect your score by reducing your average age of accounts.”

Is it bad to have lots of credit cards with zero balance? ›

Keeping a low credit utilization ratio is good, but having too many credit cards with zero balance may negatively impact your credit score. If your credit cards have zero balance for several years due to inactivity, your credit card issuer might stop sending account updates to credit bureaus.

Is it better to cancel unused credit cards or keep them? ›

In most cases, however, it's best to keep unused credit cards open so you benefit from longer credit history and lower credit utilization (as a result of more available credit). You can use the card for occasional small purchases or recurring payments to keep it active as opposed to using it regularly.

Is 0 credit card utilization bad? ›

While a 0% utilization is certainly better than having a high CUR, it's not as good as something in the single digits. Depending on the scoring model used, some experts recommend aiming to keep your credit utilization rate at 10% (or below) as a healthy goal to get the best credit score.

Is zero credit worse than bad credit? ›

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 zero credit card debt good? ›

Generally, a zero balance can help your credit score if you're consistently using your credit card and paying off the statement balance, at least, in full every month.

What hurts your credit score? ›

Making debt payments on time every month benefits your credit scores more than any other single factor—and just one payment made 30 days late can do significant harm to your scores. An account sent to collections, a foreclosure or a bankruptcy can have even deeper, longer-lasting consequences.

What is the disadvantage of zero balance account? ›

Disadvantages of Zero Balance Savings Accounts

This may include a limited number of free chequebooks, fewer online banking facilities or a cap on the number of free transactions per month. 2. Potential for mismanagement: The absence of a minimum balance requirement could lead to less disciplined financial management.

Is it good to keep a credit card open with a zero balance? ›

In fact, having a zero balance or close-to-zero balance on your credit cards can be beneficial in many ways. A few of the most important benefits are: reducing debt, improving one's credit score and avoiding late payments and/or interest charges.

Is it better to have a low balance or no balance? ›

The lower your balances, the better your score — and a very low balance will keep your financial risks low. But the best way to maintain a high credit score is to pay your balances in full on time, every time.

Is it bad if I never use my credit card? ›

It's important to keep your credit utilization ratio under 30% — this is a healthy balance of using your credit to a reasonable degree. However, never using your credit card could result in a lack of financial data for lenders/bureaus to collect to determine your credit score.

Is it better to close a credit card or leave it open with a balance? ›

If you can avoid closing a credit card, or if you don't really need to close a card, you're almost always better off leaving your account open. This is especially true if you're trying to improve your credit score or at least not hurt it, and if you have a rewards balance you haven't yet used.

Is 7 credit cards too many? ›

How many credit cards is too many or too few? Credit scoring formulas don't punish you for having too many credit accounts, but you can have too few. Credit bureaus suggest that five or more accounts — which can be a mix of cards and loans — is a reasonable number to build toward over time.

Is it better to leave credit cards open with zero balance? ›

In general, it's better to leave your credit cards open with a zero balance instead of canceling them. This is true even if they aren't being used as open credit cards allow you to maintain a lower overall credit utilization ratio and will allow your credit history to stay on your report for longer.

Is it better to pay off your credit card or keep a 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.

Does having no debt hurt credit score? ›

Having no credit card debt isn't bad for your credit scores, but you do need to maintain open and active credit accounts to have the best scores. By using your credit cards and paying the balances off monthly (so that you carry no debt), you could achieve an excellent credit score.

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