Should You Close a Credit Card with a Zero Balance?
5 Min Read | Last Updated: August 15, 2023
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
Learn about the potential trade-offs involved in closing a zero-balance credit card, as it may influence both your credit score and long-term financial health.
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 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.
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.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
| 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.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
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, 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.
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, 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.
When to Consider Closing a Credit Card With a Zero Balance
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.
Closing a Credit Card with a Zero Balance
If you opt to close your credit card, it’s a good idea to follow these steps:
- Redeem all unused points and rewards on your account.
- Pay off your balance.
- Switch any recurring payments you wish to keep to another card.
- 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.
- 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.
- 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.
Frequently Asked Questions
Closing a card usually impacts two credit score factors: credit utilization ratio and average age of credit.
When you cancel a card you lose access to that card’s credit limit, so your overall credit limit goes down. Unless you carry a zero balance on all your credit cards, this change leads to a higher credit utilization ratio which can negatively impact your credit score. This is especially important if the increase in your credit utilization will surpass 30% of your available credit.
Closing a credit account can impact your credit score, but there’s no one-size-fits-all formula to determine how many points your credit score will change.
The exact amount your credit score will change when you close an account could depends on a few factors like payment and credit history, how many other credit card accounts you have and their average ages as well as your credit limit.
If you close an account with a zero balance, it may initially hurt your credit score. But, if there were no late payments, outstanding debts, or other negative marks on the account, your credit score will likely return to normal within a few months.
Some cardholders want to close a credit card with a zero balance if they don’t plan on making purchases with that credit card any longer. Others want to close a credit card account as soon as they make the last payment. This may be a good financial decision for cardholders who may be tempted to overspend using credit cards, since closing the account could help you limit your spending. But, regardless of the reason, closing a credit card could impact your credit score. So, if there’s no annual fee on the card or any other pressing reason to close the account, you may want to keep the credit card open indefinitely so you don’t hurt your score.
The Takeaway
Keeping a credit card with a zero balance open may help you improve your credit score, since it can lower your credit utilization ratio and could increase your average age of credit. 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.
1 “Everything you need to know about credit utilization ratio,” Bankrate
2,3 “What Is a Good Credit Score?,” Experian
4 “How Long Do Closed Accounts Stay on My Credit Report?,” TransUnion
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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