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
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.
Is a 0 balance good for credit score? ›
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 better to have more credit cards with zero balance or less? ›
Keeping a low credit utilization ratio is good, but having too many credit cards with zero balance may negatively impact your credit score. If your credit cards have zero balance for several years due to inactivity, your credit card issuer might stop sending account updates to credit bureaus.
Is it bad to close a credit card with zero balance? ›
Your credit utilization ratio goes up
By closing a credit card account with zero balance, you're removing all of that card's available balance from the ratio, in turn, increasing your utilization percentage. The higher your balance-to-limit ratio, the more it can hurt your credit.
Is 0 credit card utilization bad? ›
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.
Should I leave my credit card balance at 0? ›
Generally, a zero balance can help your credit score if you're consistently using your credit card and paying off the statement balance, at least, in full every month.
Do you build credit from 0? ›
If you've never had credit of any kind, there are several ways you can begin to build a credit history. This could include: Applying or being approved for a credit card for fair credit, such as a secured credit card. Becoming an authorized user on another cardholder's account.
Should I pay off my credit card in full 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.
How to raise credit score? ›
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.
Bottom line. If you have a credit card balance, it's typically best to pay it off in full if you can. Carrying a balance can lead to expensive interest charges and growing debt. Plus, using more than 30% of your credit line is likely to have a negative effect on your credit scores.
A perfect credit score of 850 is hard to get, but an excellent credit score is more achievable. If you want to get the best credit cards, mortgages and competitive loan rates — which can save you money over time — excellent credit can help you qualify. “Excellent” is the highest tier of credit scores you can have.
How fast can I rebuild my credit? ›
How long does it take for your credit score to go up?
| Event | Average credit score recovery time |
|---|
| Bankruptcy | 6+ years |
| Home foreclosure | 3 years |
| Missed/defaulted payment | 18 months |
| Late mortgage payment (30 to 90 days) | 9 months |
3 more rowsJul 27, 2023
Similarly, if you pay off a credit card debt and close the account entirely, your scores could drop. This is because your total available credit is lowered when you close a line of credit, which could result in a higher credit utilization ratio.
Does zero balance hurt 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.”
What habit lowers your credit score? ›
Making a Late Payment
Every late payment shows up on your credit score and having a history of late payments combined with closed accounts will negatively impact your credit for quite some time. All you have to do to break this habit is make your payments on time.
What credit card has a $5000 limit with bad credit? ›
The U.S. Bank Altitude Go Visa Secured Card is the best option if you have limited/poor credit and are looking for a high credit limit. You can deposit anywhere from $300 to $5,000, making your maximum credit limit available $5,000.
Is it OK to have a zero balance account? ›
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.
Do 0% credit cards hurt credit score? ›
This is where charging large purchases to a 0% intro APR credit card could cause some trouble. Sure, you may not pay interest for a limited period. But you'll bring up your credit utilization, effectively bringing down your score. The damage isn't permanent, but it could affect your personal finances in the short term.
Is negative balance good for credit score? ›
In fact, a negative balance could actually help you improve your credit scores. For example, a negative balance could potentially affect your credit utilization—a measure of how much of your available credit you're using. Experts recommend using no more than 30% of your available credit.
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.
