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Should You Close a Credit Card with a Zero Balance?

Closing a credit card with a zero balance may lower your credit score. But in certain situations, it may be better for your financial well-being.

By Michael Grace | American Express Credit Intel Freelance Contributor

5 Min Read | August 4, 2021 in Cards

 

At-A-Glance

Closing a credit card with a zero balance may increase your credit utilization ratio and potentially drop your credit score. 

In certain scenarios, it may make sense to keep open a credit card with no balance.

Other times, it may be better to close the credit card for your financial well-being.

You finally sent in that last payment and your credit card has a zero balance. After you’ve patted yourself on the back for paying off that loan, you plan to call the lender and close your card.


Not so fast. Let’s explore why it may or may not be a good idea to close a credit card with no balance.

 

How a Credit Card with No Balance Affects Your Credit Utilization Rate

The amount of credit you use in relation to the amount of money creditors are willing to lend you is your credit utilization ratio. Your credit utilization ratio is one of the biggest factors used to determine your credit score. It accounts for 30% of your credit score under the FICO scoring model and is labeled “extremely influential” under the VantageScore model. Experts recommend keeping your credit utilization ratio below 30%. Any higher may lower your credit score.


If you choose to close a credit card with a zero balance, that means your total credit limit will decrease. However, it also means your credit utilization ratio will increase if you carry a balance on other credit cards.


For example, let’s say you have three credit cards with a $5,000 limit on each for a total credit limit of $15,000. If you have zero balance on one card and a total balance of $5,000 across the other two, that’s a 30% credit utilization ratio – the upper limit of the recommended zone. But if you close the card with a zero balance, your total credit limit drops to $10,000 and the same $5,000 balance results in a utilization ratio of 50%, as seen in the accompanying table. That’ll likely shave points off your credit score.

 

Impact of Closing Zero Balance Credit Card on Credit Utilization Ratio

Credit Cards Credit Limit on Each Total Credit Limit Credit Balance Credit Utilization Ratio
3 $5,000 $15,000 $5,000 30%
2 $5,000 $10,000 $5,000 50%

 

The Relationship Between a Credit Card and Your Credit History 

The length of your credit history constitutes 15% of your FICO credit score. The two factors that influence this portion of your score are the age of your oldest account and the average age of all your accounts. So if you owe payments on multiple credit cards and would like to close one, consider paying off and closing the newest card first. Closing your newest card will have the least impact on the average age of your credit history. In turn, this may lessen a potential ding to your credit score, possibly raise your average age of credit, and potentially boost your credit score.


Of note, a closed account will remain on your credit report for many years – 10 years if you have no history of late payments and seven years if you have missed payments. The positive account stays longer to reward responsible credit payment behavior.

 

Need More Credit? Having a Zero Balance Credit Card May Help

If you plan to apply for additional credit for a big purchase – such as a mortgage, home equity line of credit, or car loan – within a year after paying off a credit card, keeping it open with a zero balance may strengthen your credit score. Generally speaking, you would show a lower credit utilization ratio, longer age of credit, and strong payment history, which add up to 80% of your FICO credit score.


It also may provide a safety net to help pay for any emergency or unplanned expenses, such as medical care or car repairs.

 
It may be helpful to know that after a long period of inactivity, sometimes a credit card company may lower your credit limit or even close your account. Using that credit card for automatic payments on small recurring expenses, such as a streaming service or gym membership, is one way you can avoid that. 

 

When to Consider Closing a Credit Card With a Zero Balance

Sometimes closing a credit card with a zero balance makes sense, experts say. For example:

  • High annual fee: If your credit card includes a high annual fee, experts suggest you weigh that charge against the perks and benefits of the card. For example, paying the annual fee may be worth it if you typically receive and use a reward such as a free hotel night or companion airline ticket. If the annual fee offers benefits you don’t use, you may be better off closing the card.
  • Temptation: Generally speaking, your overall financial wellness should outweigh a temporary drop in credit score. So if keeping the credit card open creates too much temptation to spend, it may be better to close the account.
  • Data breach: If your card issuer suffers a data breach or you fall victim to identity fraud, call your credit company to discuss your options. It may make sense to close the account, even though the card issuer will typically provide a new credit card number for the same account – which doesn’t affect your credit score.

 

Closing a Credit Card with a Zero Balance

If you opt to close your credit card, advisors suggest following these steps:

 

  1. Redeem all unused points and rewards on your account.
  2. Pay off your balance.
  3. Switch any recurring payments you wish to keep to another card.
  4. Call the card issuer, confirm the balance is zero, and then inform it you’re closing the account. Alternatively, you may be able to cancel online.
  5. As a backup, it’s good practice to mail a certified letter to the card issuer that you’ve closed the account and request a confirmation letter. Many issuers send such a letter as part of their process, regardless.
  6. A month or so later, check your credit reports to confirm the account appears as closed and with a zero balance. If you note any incorrect information, reach out to the credit reporting agency.

 

The Takeaway

Keeping open a credit card with a zero balance may help you improve your credit score. It also may serve as a safety net for unforeseen or emergency expenses. However, under certain circumstances, closing your account may make more sense for your financial well-being. 

Michael Grace

Michael Grace is a personal finance and technology freelance writer based on Long Island, N.Y. 

 

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. 

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