To maintain a healthy credit score, it's important to keep your credit utilization rate(CUR) low. The general rule of thumb has been that you don't want your CUR to exceed 30%, but increasingly financial experts are recommending that you don't want to goabove 10% if you really want an excellent credit score.
But what would happen if you have 0% utilization rate? To the credit card issuers, it may not look as good as you think.
"For credit cards, it's important to 'use but not abuse' those cards," Jim Droske, president of the credit counseling company Illinois Credit Services (and someone with a perfect credit score), tells Select. The key is to feel comfortable putting everyday expenses on your card with the knowledge you can pay off the bill at the end of the month.
Below, we take a look at how to calculate your credit utilization rate and why keeping yours at 0% may reflect negatively on your credit score.
How to calculate your credit utilization rate
Your credit utilization rate (also known as your credit utilization ratio or debt-to-credit ratio) measures how much credit you are using compared to how much you have available. The calculation looks at both your credit card balance and your credit card limit.
For example, if your current balance is $2,000 and you have a $5,000 limit, that makes your credit utilization rate 40%.
($2,000 / $5,000 = 0.4 X 100 = 40%)
"It's not the dollar amount owed that's important, it's the percentage," Droske says. "So, a $500 balance on a $10,000 credit limit is a 5% ratio, but the same $500 balance on a $1,000 limit is 50%."
Why you shouldn't go as low as a 0% credit utilization rate
If your CUR is 0%, it shows lenders and credit card issuers that you aren't making any purchases on your credit card. Remember, it's important to use your card.
"When a credit card account is reported with a zero balance, some scoring models will look at a zero balance as if the card is not being used," Droske says. "Maybe it's in your drawer at home, or, for whatever reason, you aren't using it at that point. Not using it at all is not as good as using it in very small, controlled ways."
While a 0% utilization is certainly better than having a high CUR, it's not as good as something in the single digits. Depending on the scoring model used, some experts recommend aiming to keep your credit utilization rate at 10% (or below) as a healthy goal to get the best credit score.
How to lower your credit utilization rate and get a higher credit score
It's important to make your CUR as low as it can be, without hitting 0%. This will help you get a good credit score, which will in turn help you qualify for the best rewards credit cards.
To improve your CUR, work on paying down your existing balances before doing anything else. If you already have a good credit score but are still struggling to pay off credit card debt, consider getting a balance transfer credit card. Balance transfer cards offer temporary interest-free periods so you can just make payments toward your principal balance without worrying about accruing interest.
If you want to maximize no-interest periods, consider the Citi Simplicity® Card with a 0% intro APR for 21 months on balance transfers from date of first transfer (after, 19.24% - 29.99% variable APR; see rates and fees). Balance transfers must be completed within four months of account opening. There is an intro balance transfer fee of 3% of each transfer (minimum $5) completed within the first 4 months of account opening. After that, your fee will be 5% of each transfer (minimum $5).
Once you paid down at least some of your balance, it may make sense to then ask for a credit limit increase, as long as you're confident you won't overspend with a higher credit limit.
How to maintain a low credit utilization rate
Already have a low utilization percentage? Make sure you continue to never charge more than you can pay off. "Don't treat credit cards as a long-term loan," Droske says. "Consider it a short-term loan and a convenient way to pay for things."
And lastly, avoid closing any of your credit cards — especially your oldest one. Closing credit cards often has an immediate negative impact on your utilization percentage (and your credit score) as your credit limit will go down.
"Low balances and high credit limits are the recipe for low utilization," Droske says.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
Maintaining a 0% utilization rate on all your credit card accounts can help your credit scores, but you can achieve excellent scores without doing so. A low utilization rate, preferably under 10%, is ideal.
Is a 0 balance good for credit score? ›
Lenders want to know both how reliable and profitable you are. If you have a zero balance on credit accounts, you show you have paid back your borrowed money. A zero balance won't harm or help your credit. To find out how we got here, we have to understand what credit is and the history of credit agencies.
Is it good to keep a credit card open with a zero balance? ›
In general, it's better to leave your credit cards open with a zero balance instead of canceling them. This is true even if they aren't being used as open credit cards allow you to maintain a lower overall credit utilization ratio and will allow your credit history to stay on your report for longer.
Is zero credit card debt good? ›
Customers can maintain such cards by paying off their full balance each month, or by simply refraining to make any purchases on their cards. Maintaining zero balance cards can help improve customers' credit scores by helping to reduce their overall credit utilization ratio.
How long does it take to increase credit score from 0? ›
It usually takes a minimum of six months to generate your first credit score. Establishing good or excellent credit takes longer. If you follow the tips above for building good credit and avoid the potential pitfalls, your score should continue to improve.
What happens if my balance is zero? ›
As the name of the account implies, this is a zero-balance account. Therefore, you don't have to maintain a minimum balance. Consequently, there is no penalty in the case of zero balance.
Does zero balance account affect credit score? ›
“Having a zero balance helps to lower your overall utilization rate; however, if you leave a card with a zero balance for too long, the issuer may close your account, which would negatively affect your score by reducing your average age of accounts.”
Does a 0 credit card hurt your credit? ›
A credit card with an introductory 0 percent APR can help you manage new debt or pay off old balances. However, a 0 percent intro APR card can hurt your credit if it causes you to carry a higher balance than usual or if you carry your balance beyond the introductory 0 percent APR period.
Does having no debt hurt credit score? ›
Having no credit card debt isn't bad for your credit scores, but you do need to maintain open and active credit accounts to have the best scores. By using your credit cards and paying the balances off monthly (so that you carry no debt), you could achieve an excellent credit score.
Is it better to pay off credit cards or leave a small balance? ›
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.
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.
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.
Why is my credit score going down when I pay on time? ›
Using more of your credit card balance than usual — even if you pay on time — can reduce your score until a new, lower balance is reported the following month. Closed accounts and lower credit limits can also result in lower scores even if your payment behavior has not changed.
How long does it take to build credit from 500 to 700? ›
The time it takes to raise your credit score from 500 to 700 can vary widely depending on your individual financial situation. On average, it may take anywhere from 12 to 24 months of responsible credit management, including timely payments and reducing debt, to see a significant improvement in your credit score.
How fast does credit score go up after paying off a credit card? ›
How long after paying off debt will my credit scores change? The three nationwide CRAs generally receive new information from your creditors and lenders every 30 to 45 days. If you've recently paid off a debt, it may take more than a month to see any changes in your credit scores.
How do I make my credit score go up? ›
If you want to improve your score, there are some things you can do, including:
- Paying your loans on time.
- Not getting too close to your credit limit.
- Having a long credit history.
- Making sure your credit report doesn't have errors.
When it comes to selecting a Savings Account, a Zero Balance Account may not possibly be the best choice. This is primarily because even though it saves you the hassle of maintaining an average balance every month, it is crucial that you look at all facets of the account before you opt for it.
What does it mean if my credit balance is 0? ›
The balance on your credit card represents the amount you owe after using your card to make purchases. If you completely pay off your statement balance by the due date each month, your balance will be zero.
Is it good to have a credit score of 0? ›
Not having a score may suggest you haven't needed to use credit yet, which isn't necessarily a bad thing. And it's not an indicator that you have poor credit, either. In fact, once you get a score, it may be better than you think.
Does 0 interest help build credit? ›
Opening a new card will increase your available credit, which typically lowers your utilization rate and helps your scores. However, if you have a 0% APR offer on a credit card, you may be more inclined to let your balance grow. Your utilization rate will then increase, which might hurt your scores.
