Spending down debt: Use the round robin plan
This repost is part of our series on strategies you can adopt to free yourself from burdensome debt.
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.
Reader Comments (Page 1 of 3)
3-13-2008 @ 6:13AM
cARRIE said...
great info
Reply
3-16-2008 @ 6:16AM
aleph said...
Good info, but not a great strategy. You have to remember all your payment dates and make sure that you are not late on any payments, otherwise the late fees will eat up any gains and ruin your credit.
If you can set them up on direct electronic pay, you might save some money, but you will also be charged some fees for doing this.
Best strategy, transfer your high interest rate balances to a low interest card and pay off what you cannot transfer. Get rid of excess credit cards that have bad rates, high penalties and cost money to keep .
3-31-2008 @ 11:57AM
David Grothaus said...
what about the late fee's and the not paying them mim. there isn't a gredit card on a 3,000 amount going to charge 35.00 what are you talking about
3-13-2008 @ 8:13AM
Sonya said...
I have a ? I have several Credit Cards no mortgage but a small rent for property only I would like to buy a house. But I have a CC's 5000+$2500+$2500+$1500+$400 Payments are $150 +75 + 75 +50 + 10 How do I pay them off quicker when I only have 1 income and no way to make any more I am maxed out every month and usually 1 or 2 other bills do not get paid I still have phone electric and car bills to pay? Then theres putting Gas in vehicle and groceries for the month. Any suggestions?
Reply
3-13-2008 @ 8:15AM
christie said...
go have a couple kids (two max....), you will get a large tax refund (i get about 8400/yr), and pay your debt off that way... if you cant do that, then you are stuck....
3-13-2008 @ 8:36AM
gd said...
if you have a fairly new car consider trading it in for a used one with a lower payment, and better gas milage. use that money to start paying off the cards. call your credit card companys and ask for a rate reduction, they may not go for it if you have been slow paying, but if you don't ask you will never know. a reduction of 1/2% to 3% would be better. also if you have been late you are all ready paying a penalty default rate. ask them to roll it back to your original rate.
3-13-2008 @ 9:04AM
JstMeNMd said...
I'd consider Credit Counciling....debt consolidation would probably be the recommendation. DO NOT open another credit card. Focus on the smallest credit card, then roll over that payment to the next card once the $400 card is paid off. You need to get the CC's down before the bank will look at you for a mortgage. Look at what you can skip monthly....expensive cell phone plan. Maybe using the cell phone as your only phone and cancelling the house line. Brown bagging lunches. No coffee purchased outside the house. Water for your drink at meals. Lots of little ways to cut out spending. Turning the heat back in the house a couple degrees save a lot on the heating costs. Sell "stuff" that you don't use or want on Ebay. Best of luck!
3-16-2008 @ 6:20AM
aleph said...
Start tracking your expenses. Don't change spending habits, right down what you buy and keep track for a couple of weeks. Remember, log every penny spent.
After a couple of weeks review where your're money is going. You might notice that you buy some impulse items or things that are not basic needs.
If your income is less than your expenses, take a look at transportation, food shopping habits, and see if you can cut down on some of these items.
Trnsportation: find someone at work and see if you can carpool, if you have children to drop off, see if you can altenante with another parent. Do you go to yard sales and buy things that are not necessary? Do you purchase gifts for others when there is no income?
Set up a budget and stick to it. The credit cards, keep making the payments, until you work out a budget and see if you can afford to pay more than the minimum.
Ask a friend or family member for a loan to consolidate the cards, turn in your cards to them until, you pay them back.
I tracked our expenses to show my husband how much he was spending on alcohol and junk food( I don't drink or buy junk food) We found out that we were spending $120 per week on alcohol alone! We changed our spending and consumer habits and found a new source of income for ourselves.
Good Luck!
3-13-2008 @ 11:32AM
Mary said...
I thought that I was the one who invented this "round robin" method of getting rid of my debt. I have been in debt for all of my adult life. I decided one day to pay off all of my credit cards and everybody under the sun by using this method of calling each debt collector who had my information and having them take $150, from my account on a bi-weekly basis. The thinking is you get paid when I get paid! I have been doing this for a little under a year and I am down to 3 credits, 1 of which is my student loans. I will be 90% debt free by early summer and I am excited!!!!!!!!!!!!!!
Reply
3-13-2008 @ 8:49AM
Lita Epstein said...
Congratulations! Glad to hear it worked for you.
Lita
Reply
3-13-2008 @ 10:11AM
blkram24 said...
i just recently refinanced my vehicle. the vehicle is worth $20,250 and i owe $26,600 so i opened a credit card to pay the difference or else i wouldnt get the lower payments for my vehicle which went from 700 to 397 a month. The only problem is that my credit card is at 11.9%(+ 5.9% prime) was this a smart move or was i just acting too quick and should of considered other available options, any suggestions?
Reply
3-13-2008 @ 10:25AM
marlo said...
I have a chapter 7, from 2007. I have rented for now going on 2 years. My rent has been paid on time each month. I never had a student loan, or credit cards. I suffered losing my home. Here is my question, my rent is paid on time each month. I want out of renting this year, and want to purchase another home. My car note has been paid on time also. I don't own anyone. I have copies of my current credit scores/credit reports. How do I start repairing my credit score of 620/692/580 right away, and is there a federal program that will help me, to acquire my next home.
Reply
4-03-2008 @ 6:28AM
Lisa V said...
A Bankruptcy, charpter 7 is usually ok with a regular bank 3 years after you are discharged. However if you talk to a mortgage broker you may be eliagable for a FHA government loan with a fixed interest rate. Your middle score is a 620 and that might work for you. A mortgage orginator should be able to give you that information and get you on your way.
Good luck
5-08-2008 @ 10:10AM
justpicky said...
go to a trustworthy mortgage company and talk to the loan officer , I know our loan officer helps us . She knew we didn't want adjustable rate / subprime loan , because I don't want to get in that situation .
I feel FIXED RATE IS better for everyone .
Or talk to a real estate company , again trustworthy . Get advice , couldn't hurt . Dont sign anything till you've all the information and you feel like you want to make that move to buy . Never rush . Think it out .
3-13-2008 @ 10:47AM
Lita Epstein said...
Marlo,
It sounds like you're doing the right things to improve your credit score, but after a Chapter 7 bankruptcy it does take several years. Keep paying everything on time and it will gradually increase. Unfortunately, a Chapter 7 bankruptcy will be on your credit report for 10 years. I'm guessing the debts written off also show on your credit report and will for seven years. You'll need to be at least three years out of bankruptcy with a perfect payment history to get your score back up to a level that would be good enough in today's stricting lending market.
Lita
Reply
3-13-2008 @ 10:47AM
M.L. Williams said...
I'm a big believer in learning more about how you value money & a fan of Suze Ormand's book on financial freedom. Just getting out of debt is great, however; we all need to plan for the future. Now that I'm on social security, not planning enough has come back to bite me so I'm playing 'catch up' by making what savings I have work for me.
Reply
3-13-2008 @ 12:00PM
McNeal said...
I was a rookie realastate investor and because of a couplke of deals gone bad I had to foreclose on three of my properties and now I have those foreclosures on my credit is this worst than bankrupsy or what can I recover by just paying my bills on time for the next 18months
Reply
3-13-2008 @ 12:17PM
Lita Epstein said...
A foreclosure does hurt, but it will drop off your credit history completely in seven years. A Chapter 7 bankruptcy stays on for 10 years.
As long as you pay your bills on time for the next 18 months you should see improvement in your credit score, but most banks won't even consider offering a mortgage to someone until they have a solid payment history for at least three years after a foreclosure.
Lita
Reply
3-13-2008 @ 12:50PM
Debbie said...
Due to some circumstances beyond my control, I have a judgement against me and would like to clean it up and bring up my credit score. We have paid off a lot of debt and things are turning around, however, how can I get this done much quicker?
Reply
3-13-2008 @ 2:42PM
LARRY said...
I have a judgement of $80,000 against me (real estate law suit). I don't have enough equity in our home to pay it. We were doing Ok (for us) before the judgement, but we have a lot of credit card debt. We owe on my wife's car ('bout $3,000), but my two pick-up's are paid off (one of them an old 1977 PU I had given to my son when he hit sixteen). My pick-up is a 1999 Dodge, I've been on a disability since 1996. One through S. S. and one with the state of Colorado, I worked for the state when I got hurt. I've tried to go back to work, but I just can't handle it. At this point I don't see how we can pay it. The judge said it'd be at 8%, and if I don't pay the judgement would go to triple. An interesting thing is none of the lawsuit papers named my wife. However, the side named both of the husband and wife. Does that mean anything? Man.... I need HELP!!!