Should You Close a Credit Card with a Zero Balance?

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

But before you do, it’s important to note that closing down a card with a zero may not be the best move for your credit score. Let’s explore some situations where closing down a credit card with no balance may, or may not, be a good idea.

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.^1,2 Experts recommend keeping your credit utilization ratio below 30%.

If you choose to close a credit card with a zero balance, your total credit limit will decrease. As a result, your credit utilization ratio will increase, particularly 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. So, if you close the card with a zero balance, your total credit limit drops to $10,000 and the same $5,000 balance is now a 50% utilization ratio, as seen in the accompanying table. That’s something that could shave points off your credit score.

Impact of Closing Zero Balance Credit Card on Credit Utilization Ratio

The length of your credit history constitutes 15% of your FICO credit score.³ 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 fact, instead of hurting your credit score, it may raise your average age of credit and could potentially boost your credit score.

Of note, a closed account could remain on your credit report for a number of years. According to TransUnion, accounts that are closed in good standing may stay on a credit report for ten years, whereas accounts that contain adverse information could remain on a report for seven years.⁴

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, all of which could contribute to your 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.

Sometimes closing a credit card with a zero balance could make sense.

Here are some situations where you may want to consider closing that zero-balance card:

• 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 your credit score. If keeping the credit card open creates too much temptation for you 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

If you opt to close your credit card, it’s a good idea to follow 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 them that 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.