Does Having a Zero Balance Hurt Your Credit Score?

A zero balance on your credit accounts does not necessarily hurt your credit score. However, in a June 2011 Bankrate.com article, Leslie McFadden noted that Barry Paperno, FICO consumer operations manager, suggests that carrying a very small balance is often better than a zero balance for your credit score.

Credit Score Basics

To fully understand the impact of zero balances on credit accounts you need to know the basic factors that affect your credit score. According to MyFICO, a site owned and operated the Fair Isaac Corporation, credit history, length of credit history, amounts owed, new accounts and types of accounts are the five major categories included in the FICO scoring model. Each of the three major credit-reporting bureaus -- Equifax, Experian and TransUnion -- uses this model.

Debt-to-Credit-Limit Ratio

Aside from other specific maneuvers you might consider to boost your score, a zero balance is usually beneficial because of your debt-to-credit-limit ratio, or debt utilization. This accounts for 30 percent of your FICO score, indicates MyFICO. Your debt utilization is the amount of your credit in use relative to your available limit. If you have $2,000 in use and $50,000 available, for example, you have a very low utilization of 4 percent. A zero balance means you have no debt in use on an account and you get credit for the limit available in your utilization ratio.

Reported Balances

You may pay off a credit balance only to quickly use the account again. This is not the same as indefinitely maintaining a zero balance. McFadden points out that credit reporting does not occur in real time. You can max out a card and pay it off quickly, but still have your credit score reflect the maxed out balance. This may not matter much unless you are buying a home, a car or another major item and need a top credit score to get a good rate. Routine card use and quick payoff generally benefits you by building good credit history.

Activity

McFadden indicated in her article that a very low balance could help your credit score because it shows the card is active but has low debt utilization. She pointed out that the credit scoring models want to see recent activity. A zero balance on some credit accounts is okay, but a zero balance on all revolving credit accounts can lead to a slightly lower credit rating based on inactive credit.