It's like a snowball that begins its run downhill near the top of the mountain. As it rolls, more snow is accumulated, it gets heavier and speeds up, and keeps getting larger and heavier as it moves. Many who are planning the purchase of a home in the next two or three years could save tens to hundreds of thousands of dollars over the life of their thirty year loan in interest if their credit scores could be raised by 75 to 100 points or more. It's not that difficult if they take on a "snowball" approach to credit card and consumer debt reduction. Some consider this approach a little backwards, as the highest balance debt isn't paid off first. Here's the plan for someone paying $650 or so every month on their credit card and consumer accounts:
- Choose the lowest balance with a significant payment, let's say $500 with a $25 monthly payment. Put every extra dollar you can into paying that loan off. If it's an extra $150/month, you'll have it paid off in less than three months.
- Take that $150 you paid on that loan, and add in the $25 you were paying monthly, and apply that $175/month to the next loan that would be paid off the fastest with that amount of money. If it's a $900 furniture balance with a $100 payment, you'll have it paid off with that $175 in just 5 months.
- Now you have that extra $175 plus the $100 you were paying on the furniture, and you have $275/month available to pay on the next loan.
Credit scoring is complicated, but the experts will tell you that you need to keep your outstanding balances below 30% of your available credit for optimum credit scores. Paying these debts down in this manner will accomplish that, plus lower your overall debt quickly. The bonus is that a lower debt-to-income ratio will also qualify the borrower for a larger mortgage.