401K to Pay Off Credit Card Debt
archive
Posted: Tue Oct 05, 2004 2:03 pm
Post subject: 401K to Pay Off Credit Card Debt
Jeff
Date: 1/28/2001 4:04 pm CDT
I've been contemplating using my 401K money to payoff my credit card debt. Is this a good idea? Is anyone aware of a good article which outlines the pros and cons of such a move? Thanks!
CardRatings.com is the most comprehensive source for comparing credit card offers. Please visit CardRatings.com to view the best rated credit cards!
archive
Posted: Tue Oct 05, 2004 2:04 pm
Post subject: 401K to Pay Off Credit Card Debt
Linda in VA
Date: 1/28/2001 4:53 pm CDT
Hi Jeff,
First, it should ba a loan against your 401k money, not a withdrawal. You probably know that already. Then the interest on the 401k loan should be significantly lower than the interest on your credit card debt.
This is a good time to do it if your 401k is invested in stocks or mututal funds which have been bouncing up and down - it's not like borrowing the money when the stock market is shooting straight up. You can probably only get half of the money - the other half is held as security (don't ask me why, since it's your money anyway.)
The pro's:
1. You will be paying interest to yourself instead of to the CC company.
2. The interest is usually much lower.
3. Often by restructuring your debt this way, you change the ratio of debt to income (as far as the CRA's reporting) so that you improve your credit profile significantly, and then can restructure other debts (like refinancing a mortgage or automobile loan).
The con's:
1. If you leave your job for any reason, and thus have to roll the 401k over to another account, the debt becomes due immediately. If you cannot repay it in full at that time, the loan becomes a distribution. Then it is subject to a 10% tax penalty, and it is also taxed in the same year as regular income. This can be a whopping setback (been there), and you have no choice about paying it all because you can't mess with Uncle Sam.
2. For many people the CC spending has become too much of a habit - or even a compulsion, and if you don't control CC spending after doing this, you just end up even deeper in debt instead of getting out. Your card company will likely raise your limit and lower your interest when you make a huge payment (that's what happened to me) - They're inviting you to do it again - don't.
3. If the stock market takes off, you will lose out on gains that might have been yours (but IMHO, if you stick to your guns and don't get back into debt again, it will be worth it).
Suggestions: be careful when setting up the repayment terms (you get to choose) because you can't change it. You want to be okay if some kind of emergency comes up. Don't set up such stringent repayment terms that you have to lower your contribution (this is especially true if you are over age 40.
The biggest suggestion of all - discuss it with your 401k administrator or financial advisor if you have one - I assume you don't or you wouldn't be asking here . I am an insurance agent, so I am familiar with most of this. However, there could be aspects of your particular situation that have not been diclosed here and need to be addressed.
Hope this helps.
Linda
http://chesapeakeassociates.cjb.net
archive
Posted: Tue Oct 05, 2004 2:04 pm
Post subject: 401K to Pay Off Credit Card Debt
Linda in VA
Date: 1/29/2001 10:00 am CDT
Hi Jeff,
I looked on Fidelity's 401k site this AM (that's where mine is) and here is their "pro's-and-con's" page:
http://www.401k.com/401k/pfp/rp/proscons.htm
They added a couple of things to what I said - like the possibility of fees. I've never had one that charged fees, though.
Linda
http://chesapeakeassociates.cjb.net
CardRatings.com is the most comprehensive source for comparing credit card offers. Please visit CardRatings.com to view the best rated credit cards!
Posted: Tue Oct 05, 2004 2:03 pm
Post subject: 401K to Pay Off Credit Card Debt
Jeff
Date: 1/28/2001 4:04 pm CDT
I've been contemplating using my 401K money to payoff my credit card debt. Is this a good idea? Is anyone aware of a good article which outlines the pros and cons of such a move? Thanks!
CardRatings.com is the most comprehensive source for comparing credit card offers. Please visit CardRatings.com to view the best rated credit cards!
archive
Posted: Tue Oct 05, 2004 2:04 pm
Post subject: 401K to Pay Off Credit Card Debt
Linda in VA
Date: 1/28/2001 4:53 pm CDT
Hi Jeff,
First, it should ba a loan against your 401k money, not a withdrawal. You probably know that already. Then the interest on the 401k loan should be significantly lower than the interest on your credit card debt.
This is a good time to do it if your 401k is invested in stocks or mututal funds which have been bouncing up and down - it's not like borrowing the money when the stock market is shooting straight up. You can probably only get half of the money - the other half is held as security (don't ask me why, since it's your money anyway.)
The pro's:
1. You will be paying interest to yourself instead of to the CC company.
2. The interest is usually much lower.
3. Often by restructuring your debt this way, you change the ratio of debt to income (as far as the CRA's reporting) so that you improve your credit profile significantly, and then can restructure other debts (like refinancing a mortgage or automobile loan).
The con's:
1. If you leave your job for any reason, and thus have to roll the 401k over to another account, the debt becomes due immediately. If you cannot repay it in full at that time, the loan becomes a distribution. Then it is subject to a 10% tax penalty, and it is also taxed in the same year as regular income. This can be a whopping setback (been there), and you have no choice about paying it all because you can't mess with Uncle Sam.
2. For many people the CC spending has become too much of a habit - or even a compulsion, and if you don't control CC spending after doing this, you just end up even deeper in debt instead of getting out. Your card company will likely raise your limit and lower your interest when you make a huge payment (that's what happened to me) - They're inviting you to do it again - don't.
3. If the stock market takes off, you will lose out on gains that might have been yours (but IMHO, if you stick to your guns and don't get back into debt again, it will be worth it).
Suggestions: be careful when setting up the repayment terms (you get to choose) because you can't change it. You want to be okay if some kind of emergency comes up. Don't set up such stringent repayment terms that you have to lower your contribution (this is especially true if you are over age 40.
The biggest suggestion of all - discuss it with your 401k administrator or financial advisor if you have one - I assume you don't or you wouldn't be asking here . I am an insurance agent, so I am familiar with most of this. However, there could be aspects of your particular situation that have not been diclosed here and need to be addressed.
Hope this helps.
Linda
http://chesapeakeassociates.cjb.net
archive
Posted: Tue Oct 05, 2004 2:04 pm
Post subject: 401K to Pay Off Credit Card Debt
Linda in VA
Date: 1/29/2001 10:00 am CDT
Hi Jeff,
I looked on Fidelity's 401k site this AM (that's where mine is) and here is their "pro's-and-con's" page:
http://www.401k.com/401k/pfp/rp/proscons.htm
They added a couple of things to what I said - like the possibility of fees. I've never had one that charged fees, though.
Linda
http://chesapeakeassociates.cjb.net
CardRatings.com is the most comprehensive source for comparing credit card offers. Please visit CardRatings.com to view the best rated credit cards!
posted by CardRatings.com at 1:46 PM
0 Comments:
Post a Comment
<< Home