DEFINITION of 'Zero Balance Card'

A credit card on which a consumer does not owe any money because he or she has 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 never charged anything to.

BREAKING DOWN 'Zero Balance Card'

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, and having an unused credit line can lower this ratio. For example, 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%. 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%.

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.

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