Keeping your credit card balances at zero isn’t always the easiest thing to do—especially now in the age of COVID. With social distancing and lockdown measures in place, people have been purchasing more online. Indeed, record spending using electronic payments—namely credit cards—has been seen in light of the pandemic.
However, maintaining zero-balance cards can prove to be beneficial to you by helping you to increase your credit score. The following five reasons will show you why zero balances are crucial to your credit.
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Paying Off Your Debt While Building Credit History
Keeping your credit card balances at zero is a good idea—but maintaining that zero balance forever isn’t the best way to go about improving your credit, either. That sounds confusing, so to simplify, it works like this: If you don’t use your credit cards, credit card companies can notice that you aren’t doing anything with your cards and stop sending account updates to the credit bureaus. Potential creditors and lenders will be more wary of you, even if you’re a responsible borrower, because they cannot easily acquire information on your recent credit history.
The best way to remedy this? Make small purchases every now and then, and quickly pay them off in order to keep your account active and your credit history constantly updated. This way, you keep your cards at a zero balance most of the time while also establishing credit history.
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Credit Utilization Ratio
Your credit utilization ratio is one of the major factors that lenders look at when determining your eligibility for loans or additional credit cards. Keeping your credit cards at a zero balance keeps your credit utilization ratio at zero, which improves your credit score.
What’s more, zero balances prevent wild fluctuations in your credit utilization. For example, if one of your credit cards has a credit limit of $4,000, but is at zero balance, and another card is using $2,000 of the allotted limit of $6000, you’re at a 20% credit utilization ratio. If for some reason you should close that zero balance card? Then you’ll have $6,000 remaining in total credit limits, $2,000 of which is tied up in debt, which shoots you up from a 20% ratio to 33% credit utilization.
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Emergency Funds
Emergency funds are all the more important with the COVID-19 pandemic. Right now, we are seeing record-high numbers of unemployment claims, which means that there are far fewer job openings than workers. If you are fired or lose your job, the zero-balance card can act as an additional safety net for you.
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Remaining Debt-Free Opens Doors
Keeping yourself debtless is a great way to position yourself well when being considered for things like cars, work and housing—and in some cases, it helps you outcompete the competition. Many people struggle with paying off their debts or keeping a clean credit history. Therefore, displaying the ability to keep a zero-balance card can push you up in places where credit is considered. Being debtless also improves your physical and mental stress. It’s better to live life without the burden of unpaid bills.
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Interest Rate Expiration
Some cards carry lowered interest rates for a certain amount of time as a promotional tactic. One thing to watch out for is the grace period when it expires, which can lead to devastating consequences if you aren’t aware of the expiry date. But keeping a zero-balance card can leads to less worrying about when promotional periods will expire—and hit you with large deferred interest fees.
It is challenging to keep those balances at zero. However, the five reasons above make it worthwhile. Pay down debts if you have them to improve your credit-worthiness!
