Q&A: 'High balance:' What it is, how it impacts credit score

Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.

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Question

Dear Speaking of Credit
How is the “high balance” amount on my credit report calculated? Does it affect my credit score in any way? – Patrick

Answer

Dear Patrick,
The “high balance” (also called “high credit” or “original amount”) is an oftentimes overlooked item on a credit report trade line that reflects the highest amount owed on that account over a set period of time.

The few score calculations that rely on this information fall within the “amounts owed” credit scoring category, which makes up 30 percent of your score.

For most consumers, these “high amounts” have little effect on their scores. Yet, as you’ll see, there are occasions, particularly with credit cards, when this high amount can seriously affect your score via one of the most influential sets of score calculations – revolving utilization.

High balance: How it’s determined

Whether labeled a high balance, high credit or original amount – depending on the credit bureau – this dollar amount can impact both major forms of credit: revolving credit (cards) and installment (loans).

  • For cards, the high balance represents the peak balance over a time period set by the reporting card company – for example, 12, 24 or 36 months.
  • For mortgage, auto and student loans, the high amount reporting is always the original amount borrowed.

Before looking at how these items can affect your score, let’s also note two more considerations:

  • Each credit card company uses different time frames for revolving high amounts.
  • Each of the three big credit bureaus will describe them in their reports in a slightly different way, as you will see in the table below.

'High balance' terms used by 3 major credit bureaus

Credit type Equifax Experian TransUnion
Installment High credit Credit limit or original amount High balance
Revolving High credit High balance High balance

How utilization percentages are calculated

If you’ve done any reading about credit scoring, you’ve undoubtedly learned that revolving credit utilization is one of the most important factors in your score. Installment loan utilization, on the other hand, may be new to you.

Whereas revolving utilization plays a major role in your score because increasing card balances are often the earliest indicators of financial difficulties, installment utilization plays a relatively minor part.

This is because mortgage and auto loan balances tend to undergo fewer changes in times of trouble – and thus provide fewer clues into the future – than credit card balances.

Revolving and installment utilization calculations use the following formulas to measure your credit usage, with lower percentages always being best for your score:

  • Current balance / credit limit = revolving utilization percentage
  • Current balance / original amount = installment utilization percentage

Impact of high balance on utilization metrics

While utilization for all loans is measured using the high amount compared to the current balance, revolving utilization only uses the high balance or high credit amount when the "credit limit" field is either intentionally or unintentionally left blank on the credit reporting trade line.

When this occurs, the FICO scoring formula substitutes the high balance or high credit for the credit limit. In essence, the calculation then becomes:

  • Current balance / high balance or high credit = revolving utilization percentage.

 

Video: What is your credit utilization ratio?

Replacing the credit limit with the high amount can be problematic for your score when the high balance or high credit is lower than the credit limit, which is typically the case with a responsibly managed card account.

As the current balance then makes up a higher proportion of the “available credit,” the result can be an unwanted higher utilization percentage and lower credit score.

For example, say your card account is being reported with a blank instead of its $1,000 credit limit, and you currently owe $500, which is also the highest your balance has ever been.

Instead of the 50 percent revolving utilization you should have ($500/$1000), you now appear to be maxed out at 100 percent ($500/$500).

When credit limit is missing from reports

Should you find yourself in a similar situation, this is what you can do:

  • First, check your credit reports from all three credit bureaus to make sure all of your credit limits are being reported. You can do so for free at AnnualCreditReport.com, and you can also check your TransUnion credit report free of charge at CreditCards.com.
  • If you find any credit limit data missing – not a zero, but a blank – contact the card company, requesting they accurately report it.
  • At the same time, or if you’re unable to resolve matters directly with the creditor, you can dispute the error with the credit bureau. They will conduct an investigation by contacting the card company, and update their records according to the card issuer’s reply.

I hope you now have a better understanding of what "high balance" is and how it affects your credit score. Thanks for asking such a relevant question!

See related: 10 surefire steps to get errors off your credit reports, High installment loan utilization hurts your credit score

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Updated: 12-15-2017