Should I close my credit card with zero balance?

The Zero-Balance Temptation: Should You Close That Credit Card?

The allure is strong. You’ve diligently paid off your credit card, leaving a satisfying zero balance. The card sits dormant, a symbol of past financial struggles perhaps, and the thought of closing it seems liberating. But before you snip that card in half with a triumphant flourish, consider this: closing a credit card with a zero balance, while seemingly harmless, could actually hurt your credit score.

The key lies in understanding how credit scoring works. Lenders assess your creditworthiness based on several factors, and one crucial element is your credit utilization ratio. This is the percentage of your available credit that you’re currently using. A low utilization ratio is seen as a sign of responsible credit management.

By closing a credit card, even one with a zero balance, you’re immediately reducing your total available credit. This, in turn, can artificially inflate your credit utilization ratio on your remaining cards. Let’s say you had a $5,000 limit on the closed card and now use $1,000 of your $10,000 remaining credit limit across other cards. Your utilization was 10% before ($1,000/$15,000), but jumps to 20% after closing the card ($1,000/$5,000). This increase, even though your actual spending hasn’t changed, signals higher risk to lenders.

Maintaining a low credit utilization ratio is crucial for a healthy credit score. Aim to keep it below 30%, and ideally, even lower. A high utilization ratio suggests you might be struggling to manage your debt, leading to a lower credit score. This can affect your ability to secure loans, mortgages, or even rent an apartment in the future.

Therefore, while the temptation to close a zero-balance card is understandable, it’s often a strategic mistake. Unless you have a compelling reason, such as high annual fees you can’t justify, keeping the card open—even if unused—is generally the wiser choice. The benefits of a higher available credit limit and a consequently lower utilization ratio outweigh the inconvenience of having an extra card.

Instead of closing the card, consider putting it away in a safe place and using it only occasionally for small purchases to maintain activity and prevent it from being closed by the issuer due to inactivity. This will help preserve your credit history and ensure a healthy credit score, ultimately safeguarding your financial future. The small effort of keeping that card open could reap significant rewards in the long run.