Are you thinking about buying a home, but you need to improve your credit score in order to get the best interest rate? Paying down debt using the round robin strategy can get you there the fastest. People with the best credit score only use 10% to 20% of their available credit, so the faster you can pay down your debt on each card, the better your credit score will be. (If you're looking to minimize your interest and a quick improvement in credit score doesn't matter, then use the snowball effect strategy instead.)

With this strategy you first focus on paying down all your credit cards to a debt level of about 30% of your available credit. For example, if you have a credit line of $3,000, to be at 30% utilization the maximum balance you should have on that card is $900. When you get all your cards paid down to 30% utilization, then start working on getting them down to 20%. Once they are all at 20% utilization then start paying them down to 10%. Your final round robin stage will be to pay off the cards completely. When you reach the 10% goal your credit score should be up by at least 30 points and could be up by as much as 70 points. If you've had a history of late payments and are now paying your credit cards on time, your credit score could improve by as much as 40 points.

Will that make a big difference when applying for a mortgage? People with a credit score of 730 or higher get the best interest rate offers. As long as your credit score is above 730 there's no reason to worry. Even if you push that score higher you won't likely get a better offer. But if your credit score is below 675 you will pay almost 2% more interest on a mortgage loan, which will mean thousands of dollars more in interest over the life of that loan. If your credit score is below 620, expect to pay 3% to 4% more interest on that mortgage loan. So taking the time to get your score up using the round robin strategy could make a huge difference in the loan packages you'll be offered.

Here's how you implement the round robin strategy. Suppose you have maxed out your cards. On Credit Card A you have a balance of $1,000 (minimum payment $10). On Credit Card B you have a balance of $2,000 (minimum payment $20) and on Credit Card C you have a balance of $3,000 (minimum payment $35). In addition you have a car loan payment of $150 and a mortgage payment of $1,000. The total cash you have available to pay bills is $1,500. To keep things simple I'm not going to include interest calculations in this example, but interest will slow down your pay off.

Month 1 you would use the $1,500 to pay:

Credit Card A $295

Credit Card B $20

Credit Card C $35

Car Loan $150

Mortgage $1000

Remaining balances after Month 1 payments (not considering interest) would be:

Credit Card A $1,000 - $295 = $705

Card Card B $2,000 - $20 = $1,980

Card Card C $3,000 - $35 = $2,965

Month 2 you would make the same payments and remaining balances after Month 2 (not considering interest would be:

Credit Card A $705 - $295 = $410

Card Card B $1,980 - $20 = $1,960

Card Card C $2,965 - $35 = $2,930

Month 3 you only need to pay $110 to reach your 30% goal on Credit Card A, so the extra money can then start working down Credit Card B. Your payments would be:

Credit Card A $110

Credit Card B $205

Credit Card C $35

Car Loan $150

Mortgage $1000

The remaining balances after Month 3 (not considering interest) would be:

Credit Card A $410 - $110 = $300

Card Card B $1,960 - $205 = $1,735

Card Card C $2,930 - $35 = $2,895

Month 4 you would pay all the extra cash you have toward Credit Card B, so you can start working that balance down to the goal of 30%. Your payments would be:

Credit Card A $10

Credit Card B $305

Credit Card C $35

Car Loan $150

Mortgage $1000

The remaining balances after Month 4 (not considering interest) would be:

Credit Card A $300 - $10 = $290

Card Card B $1,735 - $305 = $1,430

Card Card C $2,895 - $35 = $2,860

You would continuing making the same payments as you did in Month 4 until you get Credit Card B's balance down to the 30% goal of $600 ($2,000 x .30), which should happen in Month 7. At that point you make just the minimum payments on Card Card B and start paying down Credit Card C using the most you can. In about another five to six months you should reach the 30% goal on Credit Card C.

So in this scenario it would take a person about 13 months to reach the 30% goal. At that point, one should see a nice jump in credit score.Then you go back and start the round robin again paying down each card to 20% utilization to see an even bigger improvement in credit score. Ultimately you continue the round robin strategy until you get all your credit cards paid off and then use the extra cash to pay down the car loan. Once all other debt is gone you can start working on paying down your mortgage faster.

Lita Epstein has written over 20 books including the Complete Idiot's Guide to Improving Your Credit Score.


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