Can Zero Card Balance Hurt Credit Score?

Dear Credit Card Adviser,

If you don't use your credit card, does it increase your credit score as long as the credit card company is reporting a zero balance? Some say you should charge a balance of less than 20% to show utilization.

-- Vira

Dear Vira,

Thanks for asking this question during our May 16 live chat on credit scores. Sorry we didn't get to your question. It's a good one.

For those who don't know, utilization is the debt-to-credit limit ratio on revolving accounts such as credit cards. Utilization contributes toward the amounts-owed portion of your FICO score, a scoring model commonly used by lenders. The amounts-owed factor counts for 30% of your score.

Utilization is important to understand if you need to bump your credit score higher before a loan or credit card application. Unlike your payment history, which keeps a history of any missed payments, your utilization can change each time your score is pulled. You can nudge your score higher by paying down balances, increasing your credit limits or charging less on your credit cards if you pay in full each month.

As for a zero balance, FICO consumer affairs manager Barry Paperno says, "The idea here is the lower, the better, in terms of the utilization percentage, but something is better than nothing."

How low should you go? In a recent interview, FICO spokesman Craig Watts said, "If your utilization is 10% or lower, you're in great shape as far as utilization goes."

To get a low utilization, you don't need to carry a balance and pay interest. Credit card issuers typically report the balance as of your last statement date. You can pay in full and still have a balance showing on your credit report.

Utilization is figured for each card as well as all cards. While having one or some of your cards at a zero balance is fine, having zero balances on all of your revolving accounts can cost you a few points, Paperno says.

"The score wants to see some kind of activity," he says.

As for whether a zero balance will raise your credit score, it depends on what the utilization was the last time the score was pulled, as well as all the other factors that go into the score, such as payment history and number of credit inquiries.

Paperno gave an example of someone with just one credit card.

"You could have somebody with a 1% utilization rate who then pays that off and they could actually see their score drop very slightly after paying that off," Paperno says. On the flip side, he says that someone with a maxed-out card who then pays the balance off could see the score improve.

To sum up, a zero balance isn't necessarily a bad thing for your score, but having no balances on all of your credit cards in any given month could knock off a few points. Continued nonuse of a card could eventually prompt the issuer to close the account or stop sending updates to the major credit reporting agencies, which could affect utilization. Issuers, like your credit score, want to see some transaction activity.

To see how your balances are affecting your credit score, try this free FICO score estimator.