Investor's wiki

Zero Balance Card

Zero Balance Card

What Is a Zero Balance Card?

The term "zero balance card" alludes to a credit card with no outstanding balance of debt. Credit card users can keep zero balance cards either by paying off their full balances toward the finish of each billing cycle, or by just not utilizing their cards. Regardless, keeping zero balance cards can benefit credit card users by assisting with working on their credit score.

Understanding Zero Balance Cards

Many credit card users depend on their credit cards to finance regular transactions like food, gas, or different discretionary purchases. As per a survey by Clever, generally 53% of borrowers pay off their full outstanding balances every month.

This method of utilizing credit cards can be exceptionally beneficial to the client, since it allows them to appreciate benefits, for example, cash-back incentives and rewards programs without actually bringing about any interest on the debts. Since credit card companies normally work out their customers' outstanding debts toward the finish of every month, these customers' credit cards would show an outstanding balance of zero — making them zero balance cards.

In any case, what might be said about the generally 47% of customers who don't pay off their credit card balances every month? These credit card users will show a consistent balance of outstanding debt over time, the size of which will be recorded on their credit report. In the event that the outstanding balance turns out to be too large relative to their credit limit, this might adversely affect the borrower's credit score. Then again, keeping a relatively low balance of debt relative to their credit limit can assist with further developing a borrower's credit score.

On the off chance that you're experiencing difficulty keeping an outstanding balance of zero on your current card due to a high interest rate, you may be worth considering a balance transfer to a better one card.

Real World Example of a Zero Balance Card

In the past, some credit card companies would charge their customers inactivity fees in the event that they failed to make customary purchases utilizing their credit cards. This practice was made unlawful through the section of the [Credit CARD Act in 2009](/credit-card-accountability-obligation and-exposure act-of-2009), despite the fact that credit card companies are as yet permitted to charge annual fees on their cards.

Expecting a zero balance card doesn't have an annual fee, keeping the account open can benefit the cardholder by assisting with diminishing their overall level of credit utilization. For instance, assume 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.

Altogether, your combined credit limit is $12,000, and your combined balance is $3,000, giving you an overall utilization ratio of 25%. From this model, we can obviously see that keeping the zero balance card is useful in lessening your overall ratio. All things considered, assuming you closed the card your combined balance would in any case be $3,000, however your credit limit would drop to just $7,000. Accordingly, your new utilization ratio would rise to more than 40%.

Highlights

  • A zero balance card is a credit card with no outstanding balance.
  • Keeping zero balance cards can assist with further developing customers' credit scores by assisting with decreasing their overall credit utilization ratio.
  • Customers can keep up with such cards by paying off their full balance every month, or by basically holding back to make any purchases on their cards.