Credit Utilization

• Reaching a zero balance on your credit card can be a joyous occasion especially if you have a history of carrying high balances. However, closing your card is not a proper way to celebrate being debt free. Closing your credit card account raises your credit utilization ratio. A credit utilization ratio is the amount of credit charged to your account relative to your credit limit.
  
  For example, maintaining a balance of $700 on a card with a $1,000 limit means your credit utilization on the card is 70 percent. Credit utilization is taken into account for each credit card and all credit cards combined. The more credit cards you own with zero balances, the lower your overall credit utilization ratio.
  
  

Responsible Credit Management

• Creditors review information in your credit report before approving you for a new credit account. If the information in your report shows that you understand how to use credit responsibly, you are more likely to be approved for a new account. Credit cards are not loans. Instead, your credit cards are intended to carry a small balance that is repaid immediately each month before your due date. Each time you demonstrate that you understand how to use your credit account responsibly, your credit score improves. However, closing a credit card account means missing an opportunity for increases in your credit score each month.
  
  

The Impacts of a Zero Balance

• Zero balances can have a negative impact on your credit score. Some creditors close inactive accounts if they go unused for extended periods of time. An account closed by a creditor does not reflect well on your credit report. Also, account closure means an increase in your credit utilization ratio. Avoid negative impacts to your credit score by keeping your credit cards in use. Consistent activity and an account in good standing contributes to almost 50 percent of your credit score.
  
  

Credit Building Strategies

• At 80 percent of your score, the top three factors impacting your credit score each month are payment history, amounts owed and length of credit history. Zero balance cards with high credit limits and a long account history can provide a significant boost to your credit score each month when kept in use. If you want to avoid paying interest on the card, repay your debt before your grace period ends. Your grace period is the length of time you have before interest is applied to your balance. Following the Credit Card Act of 2009, grace periods must be a minimum of 21 days.