Your credit score may seem like a mysterious number 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 payment history, new credit and credit mix, the age of your credit and the amount you owe in relation to your credit limits.
When you consider all the details and how they change over time, it’s no wonder credit scores are confusing and unpredictable.
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, also known as credit 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. 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 or highest amount of credit you have owed on a specific credit card account or loan during a particular period of time as determined by the bank.
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.
Unlike credit utilization, high credit has no impact on your credit score. Let’s take a look at why.
How does high credit affect your 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 reported as 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.
Credit reporting agency Experian recommends you should strive to keep your utilization on individual accounts below 25 to 30 percent. So it’s no surprise that 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.
How does it affect credit utilization?
A high balance does not directly impact your credit score, but it can affect your credit utilization.
Credit utilization is the amount of available credit you’re currently using in comparison to your credit limit—both on an individual card and multiple cards combined. It makes up 30 percent of your credit score. So, a high credit utilization ratio would also mean a low credit score. This figure tells lenders whether or not you are someone who pays their bills on time. If you have a high credit utilization ratio, lenders may see you as a liability.
A high balance, or high credit, is different than high credit utilization. This is the highest amount of money you have ever charged to a given card, and it does not carry weight as far as your VantageScore or FICO score is concerned. However, when you have a high balance that occupies more than 30 percent of your credit limit and you fail to pay it off, your credit utilization is going to go up and your credit score is going to take a hit.
Now, let’s say you have a credit card with a $5,000 credit limit and you charge $5,000 to it, but immediately pay it off before the statement closing date. Your credit utilization in this scenario is 0 percent, but your high balance is $5,000.
Alternatively, let’s say you charge $2,000 over the course of one month to a card with a $5,000 credit limit. At the end of the billing cycle, you will have a balance of $2,000 on a card with a $5,000 limit. That translates to a 40 percent credit utilization, 10 percent over the recommended amount.
Lenders can tell by looking at your credit utilization and high balance what kind of spender you are. Do you spend big and pay your bills on time? Or, are you a messy spender with bills that rack up over time?
It is always a good idea to keep your available credits as low as possible. Running high balances on your credit card can raise your credit utilization ratio while raising your credit score.
Is it worth keeping track of your highest balance?
The more you know about your personal finances, the more prepared you will be to deal with them. Meaning, if you lose track of your spending and find yourself with a $5,000 charge you aren’t sure how you’re going to pay off, your credit score is going to suffer.
On the flip side, if you aren’t a big spender and only occasionally use your credit card, you may not notice when an unauthorized charge is posted at the end of the month. If you don’t use your credit card often, continue to check your statement frequently to make sure there isn’t any unusual activity.
It doesn’t hurt to keep an eye on your finances and high balances, simply to keep things from getting out of hand.
What to do about high credit on your report
If you suspect 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 credit bureaus—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 from negatively impacting your credit score.
If you are simply struggling to pay off a high balance due to high interest rates, for example, there are a few options worth considering in order to take control over your debt:
- Get on top of your monthly payments: This is easier said than done, but if you can manage to pay more than the minimum payment, you will have an easier time paying off a credit card that may charge high interest. When you only pay the minimum payment each month, compounding interest can make small minimum payments seem like they occur in a never-ending cycle.
- Consider a balance transfer: A balance transfer credit card is a solid option when faced with a high balance and high interest rates. With a balance transfer card, you can move over a balance to a card with an introductory 0 percent APR offer. This allows you to manage and pay off your debt easier while taking advantage of no interest charges for a predetermined period of time set by the issuer. Some of the best balance transfer credit cards have introductory 0 percent APR offers lasting 12 to 21 months.
- Use cash or debit while paying off your credit card: If you have racked up a significant balance on your credit card, it is time to stop adding to the balance before you find yourself in even more debt you can’t pay off. Try to use only debit or cash until you can pay down your credit card balance.