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I have two cards that have zero balance that I keep open for emergencies. Is that okay?
- NRS
Dear NRS,
Yes. As long as you continue to make all your payments on time and are careful not to over-extend yourself, those open credit card accounts will likely have a positive impact on your credit scores.
A credit card is a revolving account, which means you determine how much you will charge and how much you will repay each month. Because you are in control, most lenders consider how you manage credit card accounts to be a good indicator of risk when deciding whether to approve you for credit.
The two most important factors in credit scoring are your payment history and your utilization rate. Your utilization rate is also known as your balance-to-limit ratio. It is calculated by taking the total of all your credit card limits and dividing that by the total of your credit card balances.
You stated your accounts have a zero balance, which means your credit scores are benefiting from those low utilization rates.
Keeping Your Open Credit Cards Active
While having a zero balance on your accounts is great for your utilization rate, it's also important to keep them open and active. That means you may have to use them for more than just emergencies. Using your credit card accounts periodically is the best way to ensure that your credit scores reflect your current credit management skills.
When you charge small amounts and pay your balance in full each month, your account history will demonstrate to potential lenders that you know how to manage credit responsibly. You also ensure that your credit card providers won't close your account due to lack of use.
There's no need to carry a balance. Paying off the balance each month means you'll avoid paying interest fees on your purchases. If you do have an emergency and aren't able to repay the entire debt right away, plan to stay on track with payments and put as much as you can towards the debt each month.
By using your credit cards responsibly, you can reap the rewards that come with establishing a strong credit history without accumulating debt or accruing interest. As a bonus, most credit card companies now offer fraud protection, so swiping your credit card could be a safer alternative to using your debit card, even for every day purchases.
Thanks,
Jennifer White, Consumer Education Specialist
This question came from a recent Periscope session we hosted.
