What is the effect of high balances on a credit report?

High balances on a credit report can lower the credit score primarily because one of the key factors affecting credit scores is the credit utilization ratio. This ratio measures the amount of credit used compared to the total available credit. When individuals maintain high balances relative to their credit limits, it indicates to creditors that they may be overextended financially. This can signal a higher risk to lenders since it suggests that the individual is relying heavily on credit, which might lead to difficulties in repayment.

Moreover, credit scoring models, such as those developed by FICO or VantageScore, consider lower credit utilization as a sign of responsible credit management. Typically, it is recommended to keep utilization below 30% of total available credit. Balances that exceed this guideline can negatively impact a person's credit score, influencing their eligibility for future loans or favorable interest rates.

In contrast, high balances do not inherently improve credit scores or have no effect at all, and they are not only relevant during new credit applications, as ongoing credit utilization is continuously reported and factored into credit evaluations.