What Does Credit Limit/High Balance Mean?

Determining your credit score is not a simple process, as credit reporting agencies use several fairly complex ratios and formulas to assess your overall creditworthiness. One important ratio is your credit utilization rate, which compares your outstanding balances to your available limits. Improving your credit utilization rates will also improve your credit score.

Identification

Your account balance is the total amount you owe on a debt instrument such as a credit card. Your credit limit is the total amount that you can charge to the account. Generally, the lower your outstanding balance is in relation to your available credit, the better the impact on your credit score. Creditors and credit reporting agencies view lower balances as a reflection of your ability to handle credit responsibly.

Acceptable Ratio

There is no real consensus among credit industry experts as to the "ideal" ratio of outstanding balance to available limit. However, as a general rule of thumb, strive for a utilization rate of 20 percent to 30 percent. Thus, if you own a credit card with an available limit of $10,000, try to keep your outstanding balance between $2,000 and $3,000.

Considerations

For the best credit score, get an acceptable utilization for all your credit accounts, not just one or two. Even if your overall utilization rate is between 20 percent and 30 percent, one account with a 60 percent or 70 percent rate can still have a detrimental effect on your score. Therefore, when considering a repayment plan for your outstanding balances, a good strategy can be to apply any extra funds to those accounts with higher utilization rates while keeping the remaining accounts within the acceptable range.

Avoid Tranaferring Balance

You may be tempted to transfer all or portions of outstanding balances on high-utilization-rate cards to those with lower utilization rates in an attempt to "even things out." However, try to avoid this strategy, as transferring balances can also have a negative impact on your credit score. Your best option for improving your credit score as quickly as possible is to pay down those high-utilization balances in a timely manner.