Having a credit card with zero balance

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.

When to Close Credit Cards with Zero Balance

I am thinking about cancelling a few credit cards that have a zero balance that I don’t use but have a great payment history with. How will this decision on my part affect my credit scores?

The standard advice is to keep unused accounts with zero balances open. The reason is that closing the accounts reduces your available credit, which makes it appear your utilization rate, or balance-to-limit ratio, has suddenly increased.

An increase in your balance to limit ratio is a sign of risk, so your credit scores may dip a bit. However, my personal advice is to use your good judgment based on your own situation.

If you have a strong credit history, and therefore, strong credit scores, closing an account, or even several accounts likely won’t have a significant impact on your credit scores. There may be a decrease, but the scores will likely still be good enough to qualify for the best terms. So, the decrease really has no impact on your ability to get the credit you want. This is especially true if you aren’t planning to apply for credit soon, in which case you would want to maintain stability in your history.

At the other end of the spectrum are people with serious credit problems who already have poor credit scores. If you are having problems managing the debt you have, why keep an open account sitting there that tempts you to dig yourself deeper into debt? Consider closing the account so you no longer have that temptation.

Those who are on the borderline in credit score terms have a little bit more difficult choice. Marginal credit scores often indicate a person is close to their limit in terms of the debt they can manage.

If you are in marginal situation, you shouldn’t be taking on new debt. Instead, you should be focusing on reducing the debt you already have. So, if you are open to the temptation of charging more, then close the account.

If you have strong will power and are working to pay down your existing debt, then you may want the open accounts for emergencies such as getting sick or having an accident. When you’ve paid down your debt, you can start saving for those emergencies so that you don’t have to rely on credit and can close accounts you don’t use.

You shouldn’t make credit decisions driven only by a credit score. Instead, you should make decisions based on your overall financial situation, your need for the account and your ability to repay the debt. If you make the right decisions with regard to your overall financial situation, your credit scores will take care of themselves.

A credit card balance is the amount of money owed to the credit card company. A new credit card balance may take up to 24 hours to update, once a payment has been processed depending on the credit card company and method of payment employed. The balance can be positive, negative or zero depending on if money is owed, if a payment greater than the balance was made or the balance was paid in full.

BREAKING DOWN 'Credit Card Balance'

A zero credit card balance is the best approach to manage credit effectively in order to avoid the high interest rates associated with a positive balance. If there is a positive balance, paying more than the minimum monthly payment pays it down quicker, resulting in less interest owed to the credit card company.

A credit card balance is the amount of charges owed to a credit card company based on purchases made that have not been paid yet. The balance includes recent purchases, any unpaid balance, interest charges, annual fee and any other fees associated with the credit card such as a late fee or inactivity fee. Every new purchase is added to the balance, and each payment made reduces the balance.

Paying off the balance saves money on credit card interest, which reduces the money paid to the credit card company and increases monthly cash flow and liquidity. However, carrying a balance month to month lowers a credit score because it increases the credit utilization on the card. An ideal credit utilization is 20% or less. For example, if you have a credit limit of $5,000 and a $4,000 balance on your credit card, your credit utilization is 80%, which is extremely high. This type of behavior shows creditors and lenders that a cardholder is not responsible with credit and is a high risk of defaulting on a future loan or credit card payment.

Maintaining a high credit card balance can lead to disaster. If an unexpected emergency arises, possessing a high balance reduces the flexibility to use a credit card and increases the chance of going further into debt, using risky financial products or paying late fees. Credit utilization is one of the factors used to calculate a credit score. It counts for 30% of a credit score. A low credit utilization proves to creditors and lenders that a cardholder is able to manage credit responsibly.

Using a credit card is essentially using the credit card company’s money to make a purchase. In addition, a cardholder makes a purchase but pays for it with money earned in the future. The key to paying down a credit card balance is to determine the report date; the date an account is reported to the credit reporting agency and pay the bill prior to the report date or statement closing date, which increases a credit score.

Best 0% Balance Transfer Credit Cards

This posts lists a bunch of the 0% balance transfer credit cards on the market today, and having the list in the first place was motivated by a reader who managed to pay off her debt with these 0% balance transfer offers. Below is her story along with the different choices out there on the market today, including a couple options with no balance transfer fees.

During the 0% balance transfer credit cards craze of recent years, many of my friends were calling me ignorant for not taking advantage of these balance transfer offers. The idea was simple in that all you needed to do was apply for a few credit cards offering 0% balance transfers, send the money to a high yield savings account and pocket the difference in interest.

The 0% balance transfer tactic worked well, with each card earning a couple hundred dollars before taxes with minimal effort. I never bothered, though. The tactic seemed weird. It just wasn’t me and subsequently, I never talked about it here.

Now that the credit card companies are offering these 0% balance transfer offers in full force again, a reader took the plunge and wrote me an email that really changed my perception of these 0% balance transfer cards.

David, you have to write about these 0% balance transfer credit cards. I used one and it helped pay off my debt a year ahead of schedule!

Whoa. That got my interest.

Apparently, reader Shelby (fake name as she requested to stay anonymous), used these cards to transfer all her credit card debt onto 2 cards with 0% interest. Then she made every effort to pay off the balance. It was a great strategy because based on her calculation, the lack of interests helped her reach her credit card debt free goal 394 days ahead of time.

She said more people should take advantage of these offers to get out of debt and I totally agree. All you need to do is apply for 0% balance transfer credit cards and watch your debt shrink much more rapidly.

An insightful and exciting way to decrease the burden of credit card debt, while at the same time not having to pay exorbitant interest fees, is to take advantage of a 0% balance transfer credit card offer. Sure, this may seem like a foolish exercise in futility at first glance – taking out a new credit card account to get rid of credit card debt – but nevertheless, the fact remains that this can be a remarkably effective tool in your arsenal when you want to save money and diminish credit card debt.

A 0% balance transfer is a marketing tool used by credit card companies to increase the number of customers holding accounts with them, and also increase the amount of debt held within those accounts. While these balance transfers are effective for the credit card companies, they also can be a powerful aid to customers who wish to save money and pay off credit card debt. This is how the process works:

First, a customer opens a new credit card account that offers a 0% interest balance transfer program. These are not usually difficult to find, although there are variables about which customers should be aware. Some balance transfer offers are considerably longer than others, and in this case, longer is definitely better. In addition, customers would be well advised to pay close attention to the interest rate after the period of zero interest expires. It will, of course, be increased. However, some companies will charge incredibly high rates after the end of the initial period with no interest. Because of the importance of these types of details, it is absolutely vital that a customer read the fine print very carefully before deciding which credit card offer to accept.

Once the new account has been opened, customers will usually find the telephone operators with their new credit card company more than willing to assist them in transferring the balances to their new account. This is to be expected, of course, because they want as much of that money transferred into that account as possible – right up to the limit. How that account is managed after the transfer is what will make the difference in how much money is saved over the course of the zero interest period.

Once the new account has high-interest funds transferred in, this is the best time to pay down that balance as aggressively as possible. By doing this, customers may be able to completely pay off much of the credit card debt without incurring any interest fees at all, saving significant amounts of money. It is, however, vital to remain aware of when the zero interest promotion ends. In the event that there is still a balance remaining on the transferred balance as this time period comes to a close, it may be possible to open a 0% balance transfer credit card with another company, and continue the cycle further. Again, looking out for the longest period with a 0% balance will help you to diminish debt and save money.

How to Calculate When Using a 0% Balance Transfer Makes Sense

When deciding what to do about your debt, one common question is how to calculate when using a 0% balance transfer makes sense. 0% balance transfer credit cards are promotional offer that creditors extent to attract customers. The offer permits you to transfer balances from other credit cards onto the new card at an amount up to your credit limit. You will pay 0% interest on the money transferred for a set period of time, usually between six months and one year. After this period of time, any remaining balance will default to the normal interest rate, under the terms of most cards. Most 0% balance transfer credit cards charge you a fee to transfer the balance. The industry standard is a 3% fee. This fee used to be capped, which meant that there was an upper limit maximum that would be charged.

Calculating Whether 0% Balance Transfer Credit Cards Makes Sense

Your first consideration when calculating whether the 0% balance transfer credit cards make sense should be determining whether you will save enough in interest to make the 3% fee worthwhile. This will depend on the amount of money you owe and the interest rate you are currently paying.

Interest rates on credit cards can vary widely from around 5% to upwards of 25% depending on your credit score and a number of other factors. This will make a vast difference in determining whether a balance transfer makes sense in your situation or not.

Assume, for a moment, that you have a 5% interest rate. If you have a $1000 balance, that means that you are paying 5% annually on a $1000.00 balance. Although there is some variation on how creditors charge interest – some charge interest on a double month cycle- you will pay approximately $23.37 in interest over a 6 month period. This number was calculating assuming you are making minimum payments of 3% per month of the balance remaining. If you are making larger payments, you will pay less in interest. Over a one year period of time using the same calculations and assuming the same payment rate, you will pay $42.79 in interest over the course of the year. This means that if the balance transfer offer is good for six months, a balance transfer may not be right for you, since you will pay a $30.00 fee (3% of $1000) to save $23.37 in interest. However, if the balance transfer offer is good for one year, then a balance transfer will safe you about $12.00. While this is a savings, only you can decide whether that amount of money is worth the hassle of transferring a balance.

If your interest rate jumps to 15% on your credit card, the numbers look a bit different. Again assuming a $1000 balance and payments at 3% per month, you are now looking at $71.66 in interest over six months and $134.94 in interest over the course of a year. Assuming a 3% balance transfer fee of $30.00, the offer begins to look a bit more attractive.

If your credit card interest rate is 20%, with all other factors the same, you will pay $96.59 in interest over 6 months and $184.48 over one year. In this situation, a balance transfer begins to look as though it might make sense.

Therefore, it seems clear that the higher the interest rate, the wiser it is to do a 0% balance transfer. The same rule applies for high balances. If you had an $8000 balance on that same 20% card, over the course of a year you would pay $1475.89 in interest. This is quite a bit more then the $240 balance transfer fee you would pay.

Other Things to Consider about 0% Balance Transfer Credit Cards

One other major factor to consider when making the calculation of whether a 0% balance transfer credit cards make sense is whether you can actually pay the balance back within the promotional period. If you have, for example, an $8000 balance, you would need to make credit card payments of over $1330.00 per month in order to have that balance paid off within a six month promotional period. If you do not have that kind of cash lying around, you need to consider what happens when the promotional rate ends.

Typically, when a promotional rate ends, you will just have to begin paying at the regular interest rate on the remaining balance. Thus, you would need to look at what that standard interest rate was in order to determine how much you should expect to pay in interest on the remainder of the transferred balance after your promotion ends. You can do this by figuring out how much you can pay per month and subtracting that amount form the total owed. So, if you were able to pay $200 a month on your $8000 balance, at the end of six months you would still have $6800 remaining on your card. Find out what rate will be charged on that remaining balance. If the rate is higher then the rate you have now, it might not be advantageous for you to take the balance transfer offer unless you are absolutely confident that you can pay off the balance within the promotional period.

Be diligent about ensuring that you really can pay off the money within the promotional period. Do not be late on your payments or otherwise default on any agreement with the credit card company or you may find yourself spending much more money when your rate defaults to a penalty rate under the terms of the contract. Finally, do not count on simply being able to transfer the balance again at the end of your promotional rate. After the economic crisis of 2009, the days of easy credit and endless balance transfer offers are no more and there is no guarantee that at the end of your promotional term, another balance transfer offer will come along.

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Lenders Like to See Responsible Usage

For the past couple years, my credit score had been steadily increasing because I would let my balance show up on my statement, but I wouldn't let the balance get higher than 9% of my total credit limit. Then, right after the statement was issued, I would pay the entire statement balance to avoid paying interest. Then I would use the card heavily throughout the month, but I would make multiple payments per month to avoid letting the balance get too high.

In the past couple months, I tried a different strategy. I started paying the balance in full BEFORE the statement was issued, so my balance on my statement was zero dollars and my utilization was zero percent. While this did not hurt my score, my credit score stayed stagnant and was no longer increasing.

So, while I was being responsible by paying my balances down to zero, this is still viewed by lenders as being inactive and irresponsible with credit. Lenders want to see that you're responsibly managing credit, which means that you're using your credit wisely and paying it responsibly. The only way lenders can see that you're using your credit is if you let your balance show up on your statement. This does not mean that you have to pay interest. All you have to do is pay the statement balance in full before your due date and voilà! No interest and your credit score will steadily increase as long as your balance is between 1% and 9%, although I've read that it's actually best to keep your utilization between 5% and 7% if you really want to see your credit score increase significantly.

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