The Credit Score Effect

David ChristinoCredit Score

1 Easy Step to Save Money

Does My Balance Affect My Score?

Some people may wonder how payments toward credit card balances affect credit score. If I pay only the minimum payment, will this negatively impact my credit score? How much more do I need to pay in order to positively affect my score? Because exact credit score algorithms are a closely guarded secret, it’s hard to give an answer with absolute certainty.

We do know that credit utilization ratio is one major contributor. This one ratio generally accounts for 30-35% of your credit score. The lower your credit utilization ratio, the higher likelihood a lending institution will view you as a responsible borrower.

More information about credit factors

How is Credit Utilization Ratio Calculated?

The credit utilization ratio is calculated by dividing the amount owed by the amount of the credit line. For example, if you have a credit card balance of $7,000 and a credit limit of $10,000, the credit utilization ratio would be 70%. This is considered to be a high ratio, and the faster you can lower this ratio to below 30%, the quicker you will see your credit score rise.

Benefits of higher credit score

Lowering the balance on credit cards and other uncollateralized loans not only saves interest charges on the credit card used, but it can also lead to savings in other aspects of finance. We have established that lowering your credit utilization ratio below 30% will have a positive impact on your credit score, but let’s take a look at how much that can save when applying for other loans.

Applying for a Mortgage

Two borrowers go into a bank and apply for a mortgage, the one difference in their borrower profile is their credit score. The first borrower has a score of 635 and the other a score of 670. Let’s take a look at the financial impact of a 35 point difference in credit score.

Borrower A was able to obtain a $200,000 mortgage with an interest rate of 4.50%. This gives borrower A a monthly payment of $1,013. Over the life of the loan this borrower will make $364,680 in mortgage payments.

Borrower B was able to obtain the same mortgage of $200,000 at an interest rate of 4.00%. This gives borrower B a monthly payment of $955. Total mortgage payments over the life of this loan would be $343,800

Borrower B will save a total of $20,880 in interest, for having a score that is only 35 points higher.

How Does Snowball Help?

The Snowball App accelerates the pay off of practically any debt…Credit cards, Student Loans, Auto Loans and Mortgages. It does this by calculating the Spare Change from your everyday transactions.

That Spare Change is collected $5.00 at a time and sent to your creditor as two extra payments per month. And because each withdrawal is so small (about the price of a cup of coffee every few days), you won’t have to make a budget change.

These small amounts add up! Snowball users generate an average of $56.00 every month, which over a few months make a significant difference in lowering your balance. If you’re looking to increase your credit score by lowering your credit utilization ratio and save interest expense at the same time, the Snowball App is a great tool for your success.

Learn more about the Snowball App

The Takeaway

Even the smallest increase in your credit score can lead to huge financial savings when obtaining credit. Make sure to keep credit balances under the 30% credit utilization ratio and you will be on your way to lowering your monthly interest expenses.