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
It's true that getting rid of your revolving debt, like credit card balances, helps your score by bringing down your credit utilization rate. Yet, closing certain lines of credit can actually temporarily ding your credit score.
Does paying credit card to zero affect credit score? ›
Keeping a zero balance is a sign that you're being responsible with the credit extended to you. As long as you keep utilization low and continue on-time payments with a zero balance, there's a good chance you'll see your credit score rise, as well.
What happens if you pay a credit card with 0 balance? ›
So the bottom line is if you pay your credit card off every month in full, you should be able to avoid paying interest. And as a general rule, no, credit cards do not charge interest on a credit card that has a zero balance.
Why did my credit score go down when I paid off my credit card? ›
Similarly, if you pay off a credit card debt and close the account entirely, your scores could drop. This is because your total available credit is lowered when you close a line of credit, which could result in a higher credit utilization ratio.
Does it hurt your credit to close a credit card with a 0 balance? ›
Canceling a credit card — even one with zero balance — can end up hurting your credit score in multiple ways. A temporary dip in score can also lessen your chances of getting approved for new credit.
Why did my credit score drop 40 points after paying off debt? ›
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.
How to raise your credit score 200 points in 30 days? ›
How to Raise Your Credit Score by 200 Points
- Get More Credit Accounts.
- Pay Down High Credit Card Balances.
- Always Make On-Time Payments.
- Keep the Accounts that You Already Have.
- Dispute Incorrect Items on Your Credit Report.
To avoid paying higher interest rates, plan ahead and try to pay off your balance in full before the 0% offer ends. If you don't keep to the terms and conditions of your card, for example by not making your minimum payment on time, then you risk losing your introductory or promotional offer.
Is it bad to pay off a credit card in full? ›
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.
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.
Credit scores can drop due to a variety of reasons, including late or missed payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts (which may shorten your length of credit history overall), or applying for new credit accounts.
How long does it take for credit score to go up after paying off debt? ›
Will paying off debt instantly improve my credit? No. But your credit score will go up once your debt status is reported to the credit bureau by the respective lender or bank. Wait for a month or 45 days to see the impact on your credit score when you pay off your debt.
How to get 800 credit score? ›
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
What is a perfect FICO credit score? ›
A perfect credit score of 850 is hard to get, but an excellent credit score is more achievable. If you want to get the best credit cards, mortgages and competitive loan rates — which can save you money over time — excellent credit can help you qualify.
Is it better to cancel unused credit cards or keep them? ›
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.
What is the highest credit score? ›
If you've ever wondered what the highest credit score you can have is, it's 850. That's at the top end of the most common FICO® and VantageScore® credit scores. And these two companies provide some of the most popular credit-scoring models in America. But do you need a perfect credit score?
Is it bad to max out a credit card and pay it off immediately? ›
Under normal economic circ*mstances, when you can afford it and have enough disposable income to exceed your basic expenses, you should pay off your maxed-out card as soon as possible. That's because when you charge up to your credit limit, your credit utilization rate, or your debt-to-credit ratio, increases.
Will my credit score go up if I pay off my credit card in full? ›
Paying off your credit card balance every month is one of the factors that can help you improve your scores. Companies use several factors to calculate your credit scores. One factor they look at is how much credit you are using compared to how much you have available.
How much will my credit score go up if I pay off my credit card? ›
If you're close to maxing out your credit cards, your credit score could jump 10 points or more when you pay off credit card balances completely. If you haven't used most of your available credit, you might only gain a few points when you pay off credit card debt.
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.
