Zero Balance Card

A zero balance card is a credit card on which a consumer does not owe any money because they have paid any balances owed in full and has not made any new purchases.

A zero balance card could also be one that a consumer applied for and was approved for, but to which the consumer has never charged anything. This is available credit so it is accessible to the consumer should they ever need it, but the card has never been used or likely is not used on a regular basis.

Before the Credit CARD Act of 2009, consumers with zero balance cards sometimes found that they had been charged a dormancy fee or inactivity fee for not using their cards. The Act made these fees illegal. Carrying a zero balance card could still cost a consumer money if the card has an annual fee, however.

Assuming a zero balance card does not have an annual fee, keeping the account open can benefit the cardholder by boosting his credit scores. Credit utilization is a major component of a consumer’s credit score, with a lower ratio viewed more favorably and having an unused credit line can lower this ratio.

Suppose Sarah has three credit cards: one zero balance card with a $5,000 credit limit, one card with a $1,000 balance and a $4,000 credit limit, and one card with a $2,000 balance and a $3,000 credit limit. The total amount of credit she is using is $3,000, and her total available credit is $12,000, making her credit utilization ratio 25 percent. If she closed the zero balance card, her total available credit would drop to $7,000 and her credit utilization ratio would increase to 43 percent.

Credit scoring models look at a consumer’s overall borrowing picture, so there’s no way to know for sure how closing the zero balance card could affect Sarah’s credit score, but it could go down as a result. The more it looks like Sarah needs to use the limited credit available to her, the higher risk she appears to pose to potential lenders and creditors.

Sarah might find that her credit card issuer eventually cancels her zero balance card if she doesn’t use it at all; customers who don’t use their credit cards aren’t profitable. If she wants to keep the account open but stay out of debt, she can make an occasional small purchase and immediately repay it in full. This practice will also establish a credit history of on-time bill payment, which is another major factor in boosting a consumer’s credit score.