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 categories, including your credit history. payment, amounts owed against 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 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 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, and that’s the case with “high credit.”
What is high credit?
A high credit may also be referred to as a “high balance” or “original amount”. This figure is the highest monthly balance you owe on a specific credit card account or loan during a given period, as determined by the bank.
How? ‘Or’ What
Believe it or not, that high amount of credit could impact your credit score, even if your current balances are much 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 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.
How Does High Credit Affect 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 report. In this case, your high credit amount will be replaced by 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%.
Given that credit reporting agency Experian recommends that you strive to keep your usage on individual accounts below 25-30%, it’s no wonder that high credit can damage a credit score. in the scenario above. 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.
What to do if there is high credit on your report
If you think 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 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.