Your credit score may seem like some mysterious number out of nowhere, but that’s only because such a wide range of factors come into play. FICO scores, for example, consider five different categoriesincluding payment history, new credit and credit mix, how old your credit is, and how much you owe against 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 much more important than others. According to myFICO.com, your payment history is the most important factor in your credit score, accounting for 35% of your final score. The next step is knowing how much you owe against your credit limits, also known as credit usage. This factor still accounts for 30% of your score.
But how do you manage your credit now isn’t the only factor that determines your score. Sometimes even past tense usage can come back to haunt you. This is the case of “high credit”.
What is high credit?
A high credit may also be referred to as a “high balance” or “initial amount”. This figure is the highest monthly balance or amount of credit you have owed on a specific credit card account or loan during a given period, 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 can be the highest balance you’ve had on your credit card in the past 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 using credit, high credit has no impact on your credit score. Let’s see why.
How Does High Credit Affect Your Credit Score?
In many cases, high credit does not come into play. In most cases, the highest balance you have on a credit card only counts when your credit limit is not mentioned in your credit file. In this case, your high credit amount will be reported as your credit limit using the FICO scoring method. And this is where things get complicated.
Imagine for a moment that you have a credit card with a limit of $20,000, which you used to pay for $4,000 in new appliances several months ago. You have 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 was listed on your credit report as a credit limit, your current usage of that credit card would be 75% using the following formula:
Current credit card balance / high credit = usage
This is far from reality since your usage would be considerably lower if your actual credit limit ($20,000) were taken into account. In this case, your usage would only be 15%.
Credit reporting agency Experian recommends you should strive to keep your usage on individual accounts below 25-30%. So it’s no surprise that high credit can hurt a credit score in the above scenario. Experian also notes that consumers with the best credit ratings keep their usage below 10% in most cases, so that’s something to keep in mind.
How does this affect the use of credit?
A high balance doesn’t directly impact your credit score, but it can affect your credit usage.
Credit usage is the amount of available credit you are currently using against your credit limit, both on an individual card and on multiple cards combined. This represents 30% of your credit score. So a high credit utilization ratio would also mean a low credit rating. This number tells lenders whether or not you are someone who pays bills on time. If you have a high credit utilization ratio, lenders may consider you a liability.
A high balance, or high credit, is different from high credit utilization. This is the highest amount you’ve ever loaded onto a given card, and it has no weight in regards to your VantageScore or FICO score. However, when you have a high balance that takes up more than 30% of your credit limit and you are unable to pay it off, your credit usage will increase and your credit score will take a hit.
Now, let’s say you have a credit card with a credit limit of $5,000 and you charge $5,000, but you pay it off immediately before the statement closing date. Your credit usage in this scenario is 0%, but your highest balance is $5,000.
Alternatively, suppose you charge $2,000 in a month on a card with a credit limit of $5,000. At the end of the billing cycle, you will have a balance of $2,000 on a card with a $5,000 limit. This translates to a credit utilization of 40%, or 10% more than the recommended amount.
Lenders can determine, by looking at your credit usage and high balance, what type of consumer you are. Do you spend big and pay your bills on time? Or are you a messy spendthrift with bills piling up over time?
It’s always a good idea to keep your available credits as low as possible. Running high balances on your credit card can increase your credit utilization rate while increasing your credit score.
Is it worth keeping track of your highest balance?
The more you know about your personal finances, the better prepared you will be to manage them. This means that if you lose track of your expenses and end up with a $5,000 charge you don’t know how you’re going to pay back, your credit score will suffer.
On the other hand, if you’re not a big spender and only use your credit card occasionally, you might not notice an unauthorized charge showing up 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’s no unusual activity.
It doesn’t hurt to keep an eye on your finances and high balances, just to keep things from getting out of control.
What to do if there is high credit on your report
If you suspect that high credit might be hurting your credit score, there’s a way to find out. Go to AnnualCreditReport.com and get a free copy of your credit reports from all three credit reporting agencies (Experian, Equifax and TransUnion). From here, you can check to see if your high credit amount is being reported for the accounts in question, or if your actual credit limit is being reflected as it should.
If you don’t know which one is used, you can read more about how to read a credit report. And if you find incorrectly reported credit limits on any of your credit reports, you should take immediate action to dispute those errors with the credit bureaus to prevent them from negatively impacting your credit score. .
If you’re simply struggling to pay off a high balance due to high interest rates, for example, there are a few options to consider in order to take control of your debt:
- Control your monthly payments: It’s easier said than done, but if you manage to pay more than the minimum payment, you’ll have an easier time paying off a credit card that can charge high interest. When you only pay the minimum payment each month, compound interest can make small minimum payments seem like they’re happening in an endless cycle.
- Consider a balance transfer: A balance transfer credit card is a solid option when you’re dealing with a high balance and high interest rates. With a balance transfer card, you can transfer a balance to a card with a 0% APR introductory offer. This allows you to more easily manage and repay your debt while enjoying no interest charges for a predetermined period set by the issuer. Some of the best balance transfer credit cards have 0% APR introductory offers that last 12 to 21 months.
- Use cash or debit while paying off your credit card: If you’ve built up a large balance on your credit card, it’s time to stop adding to the balance before you end up with even more debt that you can’t pay off. Try to use only debit cards or cash until you can pay off your credit card balance.