What is a Zero Balance Credit Card
Credit cards have completely changed the way people tend to spend money in today’s era. Within the past few there has been an exponential rise in the number of credit card users and online transactions.
In order to cater to the needs of credit card users’ financial institutions and credit card providers have come up with new and innovative line up of products. One of such products is zero balance credit cards that have become quite popular amongst credit card users in the UAE.
Technically the term zero balance credit card is used to refer to a credit card that has no outstanding debt in the form of balance. Credit card owners can uphold zero balance credit cards by either paying off the entire balance at the end of their billing cycle or by refraining from using the card.
One of the primary benefits of maintaining zero balance over a credit card is that it helps cardholders to improve their credit score. This is mainly due to the fact that maintaining zero balance over a credit card reduces the credit utilization which in turn improves the credit score of the cardholder.
Understanding Zero Balance Credit Cards
A large number of credit card users are dependent on their credit cards in order to make payment for their day to day expenses such as gasoline, groceries, etc. According to a survey by CNBC approximately 53% of people that opt for credit pay off their complete outstanding debts every month at the end of their billing cycle.
The zero-balance approach of using credit cards is quite beneficial for credit cardholders as it allows them to enjoy a plethora of benefits such as cashback incentives, reward programs without paying a single penny as debt. Moreover, with the zero-balance approach of credit cards, users can ensure a good credit score. As the majority of credit card companies calculate and generate the bills of their customers at the end of the month the outstanding balance of these customers turns out to be zero- which in turn makes them zero balance credit cards.
Customers who do not tend to pay the complete outstanding bill of their credit card each month these users will show a stable balance of unsettled balance from each month which will be recorded on their credit report.
An important point to be kept in consideration while not following the zero-balance approach of credit cards is that if the outstanding balance turns out to be larger than the credit limit of the user then in that case the approach will have a negative impact on the credit score of the user. Contrary to this in the case of a zero balance approach, the credit score of the cardholder will improve.
If you are having issues in maintaining zero balance on your credit card due to high rates of interest, you can consider the option of a balance transfer to another card that will help you to maintain zero balance easily without struggling with your outstanding debts.
Examples of Zero Balance Credit Cards
Back in the time some of the credit card companies would charge their card users with an inactivity fee in case there were no regular purchases being made using the credit card. However, with the introduction of the credit card ACT in 2009, this practice was declared illegal. Credit card companies were permitted to charge an annual fee on the credit card but not the inactivity fee.
Considering the fact that zero balance credit cards have no annual fee associated with them, keeping the account open will benefit the cardholder by decreasing the credit utilization. To understand this let us consider an exemplary situation.
Suppose you have three different credit cards with different credit limits i.e. AED 5000 (zero balance), the second credit card has a credit limit of AED 4000, and a balance of AED 1000, and the last card has a limit of AED 3000 and a balance of AED 2000.
When three of these credit cards put together the combined credit limit is AED 12000 and the balance is AED 3000 making the credit utilization ratio equivalent to 25%. With this example, it is clearly evident that keeping zero balance is quite helpful in reducing the overall credit utilization ratio of the cardholder.
In a Nutshell
With this thread, it is quite clear that zero balance credit cards turn out to be quite beneficial for the credit score of a cardholder. If you are applying for a loan and want to reduce your balances so as to attain a better credit score you can opt for the zero-balance approach followed by not making any hefty purchases in the upcoming days. This way your zero balance will be reflected in your credit score that will help you to get the loan.