Ever heard of the term Plastic Money? Well, both debit and credit cards are just that. These two cards are plastic payment cards, issued by financial institutions, to be used in lieu of paper currency. While debit cards are only used to withdraw funds from one’s bank account, the credit card goes much further.
Technically, credit cards are used to borrow funds. The credit card user/holder uses the card for transactions that require more funds than what he or she currently possesses.
These borrowed funds attract a hefty rate of interest if it isn’t paid off within a specific time period, usually thirty days. So, credit card users are typically advised to maintain zero balance, i.e., pay off their debt.
While leaving credit cards at zero balance might seem like a good idea, it might actually not be the best one in the long run! In fact, studies have shown that credit cards carrying zero balance could have an impact on one’s credit score.
What’s A Credit Score?
A credit score is the standard measure of a person’s creditworthiness. It is a number found between the range of 300 to 800 and is used to numerically express one’s credit history. Typically, people with high credit scores are much more attractive to lenders, for these people can be expected to pay off their debts. In contrast, low scores indicate the untrustworthiness of the individual to settle outstanding amounts. Thus, financial institutions generally tend to reject loan applications of individuals with low credit scores.
Believe it or not, zero balance credit cards affect score to a certain extent! One would think that paying off the card’s balance, which is equivalent of settling one’s debts, would have a positive impact on one’s credit score. However, this is not always the case.
Economic pundits are still divided in their opinions on this matter. While one section maintains that zero balance credit cards positively impacts the credit score, the other section firmly believes in the opposite. However, both sections seem to agree that having an inactive credit card could lead to a negative credit score.
How does credit card inactivity affect credit score?
Imagine applying for a personal loan and then not using the issued funds. Sure, you can return the money, but why go through the process in the first place?
Applying for a credit card and then not using it is a similar situation. Here, the funds are at your disposal, yet, you have failed to make use of it. While it does show a certain force of character, as you haven’t fallen into debt, it also shows a lack of financial acumen. Credit card inactivity is a sign of mismanaged debt utilization, and unfortunately, this could negatively impact your credit card score.
So, now we come to an all-important question that most credit card users ask- Should I leave a small balance on my credit card?
The Answer- It might be wiser to leave a small balance until your monthly credit card statements get issued. After that, immediately settle the balance, so as to avoid the interest. This could leave your credit score untouched.