Your credit score may seem like a mysterious number that is plucked from thin air, but that’s only because such a wide range of factors come into play. FICO scores, for example, take five different categories into account including your payment history, amounts owed in relation to your credit limits, age of credit history, new credit, and credit mix.
It’s no wonder credit scores are confusing and unpredictable when you consider all the details and how they change over time.
But some factors are a lot more important than others. According to myFICO.com, your payment history is the most important factor making up your credit score, accounting for 35 percent of your final score. Next up is how much you owe in relation to your credit limits, which is also known as utilization. This factor makes up another 30 percent of your score.
But how you handle your credit now isn’t the only factor that determines your score. Sometimes even utilization from the past can come back to haunt you, and this is the case with “high credit.”
What is high credit?
High credit may also be called “high balance” or “original amount.” This figure is the highest monthly balance you have owed on a specific credit card account or loan during a particular period of time as determined by the bank.
Believe it or not, this high credit amount could impact your credit score, even if your current balances are far lower now.
How is high credit calculated?
Banks and credit card issuers often determine high credit using their own set of criteria. When it comes to credit cards, high credit may be the highest balance you’ve carried on your credit card over the last 12, 24 or 36 months. With auto loans, personal loans and other non-revolving accounts, the high credit amount is the original amount you borrowed on your loan.
How does high credit affect credit score?
In many cases, high credit doesn’t come into play. For the most part, the highest balance you’ve had on a credit card is only considered when your credit limit is left off your credit report. In that case, your high credit amount will be substituted for your credit limit using the FICO scoring method. And that’s where things get messy.
Imagine for a moment you have a credit card with a $20,000 limit, which you used to pay for $4,000 in new home appliances several months ago. You’ve been able to pay off $1,000 of the balance since then, but you still owe $3,000. If your high credit amount of $4,000 were listed on your credit report as your credit limit, your current utilization on this credit card would be 75 percent using the following formula:
Current credit card balance / high credit = utilization
This is far from reality since your utilization would be significantly lower if your actual credit limit ($20,000) were being considered. In that case, your utilization would only be 15 percent.
Since credit reporting agency Experian recommends you should strive to keep your utilization on individual accounts below 25 to 30 percent, it’s no wonder high credit could damage a credit score in the scenario above. Experian also notes that consumers with the best credit scores keep their utilization below 10 percent in most cases, so that’s something to keep in mind.
What to do about high credit on your report
If you feel as if high credit might be damaging your credit score, there’s one way to find out. Head to AnnualCreditReport.com and get a copy of your credit reports from all three agencies — Experian, Equifax, and TransUnion — for free. From there, you can check if your high credit amount is being reported for accounts in question, or if your actual credit limit is being reflected as it should be. If you’re not sure which is being used, you can learn more about how to read a credit report. And if you do find credit limits incorrectly reported on any of your credit reports, you should take immediate steps to dispute those errors with the credit bureaus to stop them negatively impacting your credit score.