Score impact of maxing out 3rd line of credit


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Dear Opening Credits,
I'm a college student with two credit cards with a high balance for both of them. I was forced to open a third line of credit that can be used only for medical procedures, and my credit score is at 620. Is it bad that I have to use all of my third line of credit ($1,000) because of the cost of a medical procedure? -- John


Dear John,
The good news is that "bad" is a subjective term. Would it be positive to get a crucial health care need met? Absolutely. Would it be bad to max out not just two of your credit cards but a third one as well? I'm afraid the answer to that is also affirmative. That's because most lenders use FICO scores to understand what kind of borrower you are, and maxing out all three lines of credit will cause your FICO scores to dive.

You see, only payment history (at 35 percent of the score) is more important to a FICO score than the amount of debt you're carrying compared to the amount you can contractually borrow. The ratio of debt borrowed to total available credit is called credit utilization, and it makes up 30 percent of the score. The less debt you carry over each month, the better. You can and should use credit to establish a lengthy credit history, but no financial institution wants to see that you're overextended to the point of hitting your credit limit and staying there. It's an indication that you have neither the means nor ability to manage your finances.

FICO scores range from 300 to 850, with higher numbers indicating a long pattern of responsible credit use. Scores in the mid-700s and above are considered excellent. Always paying on time and maintaining a low debt-to-credit-limit ratio will get you there. The score you cite isn't terrible (in fact, it's in the fair range), but if you do charge this new card up to the hilt, those numbers will almost certainly drop further.

Still, I'm not implying that you should not charge the cost of a vital medical procedure. If it is the only way to get it done and you can afford the minimum payments, lowering a credit score should be the least of your concerns. Physical health trumps financial health.

Besides, you can bring those digits back up with specific actions. Remember how I mentioned that the way you pay your debts is the most crucial factor in a score? That means that if you consistently send your payments on time, your score will soon escalate. Send more than the creditor requires (and don't add more to the balance), and you will delete the debt quickly, which will broaden your utilization ratio. Again, your scores will climb.

To make the process efficient, pay more to the account with the highest interest rate and the minimum to the others. When that high-rate card's balance is gone, focus on the one with the next highest rate. With this method you'll pay the least in finance charges and pay off your debt the quickest.

Follow this plan and you're sure to impress your creditors, too. In about six months, you may want to contact each credit card company and ask to have your interest rate lowered. If they consent, a greater portion of your payment will go to the principal. In the event they decline, just keep the payments up. Eventually, you'll prove what a fabulous customer you are. Even better, you'll have proof, as that behavior will be recorded on your credit reports and reflected in your FICO scores.

See related: 18 and ready for first card: Begin here, How to build credit with a student loan 

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Published: June 24, 2015

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