One of the most stressful aspects of using a credit card is accumulating a large balance. There are many reasons why you might have a high balance, including large unexpected bills or home and car repairs. Or maybe you just really wanted a new sofa and it hit your wallet hard.
But what does this high balance mean for your credit score?
There are a number of factors that affect your overall score, but the one that will be most affected by your high balance is your credit utilization ratio. It simply means the percentage of your total credit that you have used.
When thinking about balance, it’s important to remember that 30% of your FICO score depends on your credit utilization ratio.
Here’s what you need to know about how a high balance affects your credit score.
What is a “high balance” on your credit report?
When it comes to credit cards, the term “high balance” appears in Experian and TransUnion’s credit reports, while Equifax uses “high credit”. This is the highest balance or largest amount of credit ever used on your credit card.
When it comes to your installment loans, “original amount” or “high credit” may be what you see on your report (as opposed to “large balance”) and refers to the total amount you borrowed when you first took out a loan. Since this is an installment loan, the amount will decrease with each payment and is not replenished by payments. Because of this feature, installment loans are not included in your usage calculation, which we’ll discuss next.
How does this affect the use of credit?
Credit usage is the ratio of your credit card balance(s) to your credit limit(s). This factor accounts for approximately 30% of your total FICO score and is considered extremely influential (major factor) in your VantageScore.
Usage is calculated per credit card. It looks at how much of your credit you have used in relation to your credit limit. For example, a card with a limit of $5,000 and a balance of $500 would show a usage rate of 10%. Each card will be calculated the same way, and then all your card balances and limits will be summed up to get the total utilization rate.
Experts recommend that consumers keep credit utilization below 25% whenever possible to optimize credit utilization.
The card in the previous example is in great shape in terms of credit usage, but if you have another $5,000 card with a $2,500 balance, that card will show a utilization rate of 50%. Combined, your total utilization rate of these two cards will be 30%, which is not that scary.
But 50% on one card is not good. Depending on what else is on your file, this could lower your credit score.
However, a high balance or high credit is a completely different situation. This number represents the highest amount of money you have ever been debited from your card compared to the highest balance you had after the statement closing date. It does not appear in your VantageScore or FICO score, but has other uses.
For example, if you have a $5,000 limit card, charge $5,000 and then pay to $0 until your statement closes, your usage will be 0% but your high balance will show $5,000 .
So who cares? Potential lenders want to know if you are a person who pays your bills on time and if you are using your cards and if you can make money for the issuer. So, if my high balance is $100, it shows that I’m not using my card much. If it’s a high number, I may be a more valuable customer, generating higher per-swipe fees.
High balance designations can also affect what credit limit you get on your card from the start. If the maximum amount you ever borrowed was $1,000, there is no benefit, only more risk for the lender to give you a large card limit, say $25,000.
How will this affect your credit score?
In most cases, “high balance” designations will not affect your credit score. Simply having a high credit card balance will not affect your score, unless your credit report uses your “high balance” as your credit limit. This can happen if the lender does not report the credit limit. Some payment cards, not credit cards, do this.
VantageScore treats a high balance as a credit limit for these types of accounts. However, VantageScore models will either not factor these accounts into credit card usage calculations or will not show an account as overused when an account is in good health. The same processing applies to the calculations using trend data in VantageScore 4.0. FICO does not use the high balance field when calculating FICO scores.
Do you need to know your highest balance?
When it comes to credit cards and finance in general, knowledge is often really power. Knowing what your highest balance is on all your cards is a wise financial decision and a way to keep your balance(s) from spiraling out of control.
Also, as a practical matter, if you don’t use a card at all and see a suspiciously high balance, it could be an indication that someone else’s data is leaking into your file – or worse, someone else is stealing your credit. and may indicate identity theft.
As always, challenge anything on your credit reports that you don’t think is accurate or up to date. AnnualCreditReport.com is a great resource that offers free weekly credit reports until April 2022 (before the pandemic it was a once a year service).
What to do if you have a high balance
If you’re struggling with the burden of high interest payments that make lowering your high balance seem impossible, you have options!
Consider the carryover of the remainder
A credit card with balance transfer allows you to transfer your high-interest balance to another card in order to take advantage of the introductory 0% APR offer. This gives you time to begin paying off your new card debt without increasing your total balance due to interest accruing.
Use cash or debit cards when paying off a high balance
If you’re working on reducing your credit card balance, it’s a good idea to stop topping up your balance until you’re at the point where you’re out of debt.
While cash and debit cards are non-rewarding, so are most balance transfer cards, which are a great tool to pay off your balance over time. Also, using the money you already have can help reduce the urge to overspend.
Pay more than the minimum (if possible)
When a credit card bill arrives, it can be tempting to just pay the bare minimum. While this may be easier on your wallet in the short term, it will only make the problem worse in the long term. As your balance grows, compound interest can actually wipe out the small minimum payments you made.
Of course, if your high balance is due to an emergency, it may not be possible to pay more than the minimum, but this is a strategy you can keep in mind for the future.
bottom line
Having a large credit card balance can be a stressful and costly experience. Add in accrued interest and potential late fees, and a difficult situation can quickly get worse.
The good news is that there are ways to pay off your high balance to get out of debt. From balance transfer cards to changing your spending habits, financial security is available for those willing to step out of the shadow of a high card balance.
Editorial disclaimer
The editorial content on this page is based solely on the objective judgment of our contributors and is not based on advertising. It was not provided or ordered by credit card issuers. However, we may receive compensation when you click on links to our partners’ products.
