Options include American Express EveryDay, Chase Slate, and one from Bank of America which I can’t recall the name of. This would pay off both of these cards with balances of $7,600 and $13,600. I pay $1500 a month in rent. Press J to jump to the feed. The high risks of using a 401(k) loan to pay off other debt. By taking … I can manage taking out a 401k loan to pay off both cards in 12 months if I drop my contribution down to 5%. Please contact the moderators of this subreddit if you have any questions or concerns. Lather, rinse, repeat until you are debt … This definitely is helpful! I am a bot, and this action was performed automatically. So you've got $10k in credit card debt at the moment. If you have decent credit, see if you can't get a card with a 0% BT offer for 18 months. I have 2 credit cards. --Your loan will not be reported to credit bureaus, so there’s no effect on your credit score. Cut your spending and possibly your 401k contributions to get more cashflow to get rid of that debt as quickly as possible. This sounds too good to be true, right? Thank you r/personalfinance for all the threads. And aggressively pay them down and to a zero balance. There are several credit cards out there that have balance transfer offers of 0% for 12-18 months and 0% fee (that second part is rare). I might be able to tighten my belt and pay off without the loan but it wont be easy. 1 is about $7500 with a high interest of 20+ apr. Don't use your 401(k) to pay off credit card debt, says 'credit junkie' with an 800+ score who tried it once ' I'm still on the journey': How this entrepreneur is bouncing back from 5-figure debt The danger of raiding your retirement savings. A word of caution: If you leave your job before … If your employer provides a 401(k) retirement savings plan, it may choose to … Also, I believe a 401K loan is better for your credit as it does not show on your credit report as a loan or outstanding credit due. “They should do both, even if it’s only putting the minimum amount in their 401k,” he said. I would advise against take a loan from your 401k. However, most plans require payment back very quickly if you leave your current job, or it could convert to a withdrawal, which really hits you on your taxes. A big factor will be how secure you feel in your job. [On-screen text] Should I use my 401k to pay off credit card debt? As such, I would highly suggest you pay those off as fast as you can. The other is around 2500 and under 10 apr. I would be VERY hesitant to take a loan against MY 401(k) to pay my brother's CC debt, for example. That said, the math works better for using a 401k loan vs credit card interest. What would be the best strategy for quick payoff, but long term financial success also. Avoid increasing the debit. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. I would not borrow from or withdraw from the 401k that tax benefit and the penalties will make a very expensive choice in the end. Your 401(k) loan interest rate is likely lower than the rate on your other debt. Thanks in advance for any suggestions or advice. Reasons why advise against taking a loan … Though you can open an IRA to save for retirement regardless of your employment situation, you only have access to a 401(k) through your job. 1 often true but not always. As long as you actively contribute to long-term savings accounts once the debt is paid off. Therefore, you aren’t reducing the overall debt … But I would advise against it if you think you might want to leave or if there's any danger of losing your job or during the term of the loan. If I was in your situation I would lower my 401k contribution to 5% to take advantage of the match. But nothing is worse (ok, there are a few things, but you get my point) than paying credit card … Join our community, read the PF Wiki, and get on top of your finances! 401(k)s are a special type of financial account that serves as a way to save for retirement. 2 the gains of not paying high-teens credit card interest is likely much better than the lost market returns, 3 agree, but still may make sense when considering the insane credit card interest. Many people say that you should never take a loan against your 401K. It’s not ideal, especially if you get an employer match, but it likely is better than choosing to cash out your 401(k) or taking a loan. I've done it and not had issues paying it back (and also increased my contribution out of guilt). If it were me, I would look at cutting your 401k contribution to nothing and instead dump as much money into paying off the credit cards as you can. It was well worth it. I would caution that if you do decide to go down this road, you and your family need to change your habits, or you will be paying down a 401K loan and credit card payments. So, a couple things and then I'll give you my opinion. Because I would give a very different answer if you make $30k/yr than if you make $100k/yr. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. But nothing is worse (ok, there are a few things, but you get my point) than paying credit card interest..... Credit cards can be a valuable tool and offer rewards, if they are used responsibility. Biweekly is the typical pay schedule. Attempting to use credit cards for expenses to gain the "Cash Back" benefit, our family has managed to run our Credit Card balances up, and would like to get them paid off and then cancelled. Car loan, mortgage, medical expenses, etc... or are the credit cards it? This heads off missed payment fees and protects your credit score. Usually there's a one time 4% transfer fee. That will save you thousands in interest, just make sure you pay as much as you are paying now, not the minimum payment. You mentioned you have $7500 due on one card and $2500 on another. I would pay the minimum on the cc with the 2500 balance and throw all your extra money at the 7500 cc until it is paid off. Another option available is to cut back on contributing to your retirement plan in order to free up a little money to aggressively pay off high-interest rate credit card debt. However, most plans require payment back very quickly if you leave your current job, or it could convert to a withdrawal, which really hits you on your taxes. I have great job security and have no desire to leave. The withdrawal taxes and penalty are more expensive than the credit card interest … For example, if you took a 401k loan to pay off credit card debt, stop going over the limit. Join our community, read the PF Wiki, and get on top of your finances! Thanks guys! So, even if he invests and receives a return of 7% on average for his investment dollars, he’s losing 11% (18-7=11) on the money he’s choosing to divert towards investing in lieu of paying off the debt. Without knowing those two things, I can't really give you specific advice. But then it's 0% for 12 or 14 months or so. I am a bot, and this action was performed automatically. Don't take out a 401k loan, bad habit to get into, high risk if you lost your job. OP, have you looked into 0%APR introductory credit cards w balance transfer? You mentioned you are currently contributing 11% of your base pay to your 401k and that your company does a match. Another option that would leave your retirement intact is looking for 0% balance transfer cards, but as mentioned, you'd have to change your spending habits and be sure you're not running up all the other balances (cut up all your existing cards and new ones as soon as you get them). My life has improved greatly due to this sub. So they shouldn’t pay off credit card debt at the expense of saving for retirement. Cookies help us deliver our Services. Press question mark to learn the rest of the keyboard shortcuts. Can I ask how much you make a year? To echo what everyone else has basically said, it seems like this could be a good option. I mostly accumulated this debt in my early 20s when my rent was almost half of my take-home pay. You could apply for one or two of those, do the balance transfer to take care of the current cards, and work on paying off the new cards over the 12-18 months. Taking a 401k loan for this purpose is fairly smart. With the average credit card interest rate at 19.02%, the cost of having outstanding debt on your credit card is astronomical. We got out of debt, and I paid myself back. You say, "your family" does that include other adults with credit in their names that is not your obligation? New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. Should look at 401k plan documentation or ask HR if loan needs to be repaid within 60 days or if they set up a payment plan. With Steve Rhode, The Get Out of Debt Guy. Don’t use your 401 (k) to pay off credit card debt, says ‘credit junkie’ with an 800+ score who tried it once The new coronavirus stimulus package will allow Americans to withdraw from their … You can only withdraw elective-deferral contributions from your 401 (k) in most cases. The numbers look like this to pay off your balance at your credit card rate you will pay 209.35 per month for 60 months for a total of 12,561.00 which is 3761 in interest and 8800 in principal. If you’re burdened with hefty credit card balances, school loans or other debt, however, you may be tempted to cut back on your 401(k) contributions to pay off the debt first. With the Solo 401 (k) having $50,000 in it, they take out $25,000 from the account and use that $25,000 to pay off the credit card debt in one shot. Agree w other post’s suggestion to drop the 401k savings rate to get the max match, use the rest to hammer away at this debt. Since we've seen that this strategy doesn't work for us. My debt is manageable but I can do better. 401(k)s are offered by employers as a benefit for their employees. Steve Rhode, The Get Out of Debt Guy: Is it a bad idea to use a 401k or IRA hardship withdrawal to pay off credit card debt? Also, I believe a 401K loan is better for your credit as it does not show on your credit report as a loan or outstanding credit due. I don't have a car payment. If you end up leaving for whatever reason, you'll have to pay the balance of the 401k in full. You can borrow up to half your 401 (k) balance, but no more than $50,000. Most 401 plans also do not allow you to contribute until you repay the loan. Many 401 (k) plans allow users to borrow against their retirement savings. You pay the 401(k) loan interest to yourself, not someone else. Press question mark to learn the rest of the keyboard shortcuts. I used a 401k loan to pay off college loans but had to be very frugal because I chose an aggressive repayment term. What is a 401(k) loan? Before borrowing from your 401 (k), crunch some numbers to determine how long it will take you to pay off your debt at the rate you're going and how much interest you'll have paid during that … I'm 31 years old with about 60k in my 401k. That may not be wise but we can dive into that another time. However, I'm not clear on one thing. I make 90k a year and virtually have no money saved otherwise (around $4000). Life choices: Debt vs. 401(k) I would advise against take a loan from your 401k. Please contact the moderators of this subreddit if you have any questions or concerns. What I can say, however, is that the 10% and 20% interest on your debt is likely to beat out what you would make this year in the stock market. But you really need to make sure you target the overspending issue, which isnt just a creditncard issue. While I currently have no plans to leave my current position, I definitely don't want the loan to be a reason for me to stay if an opportunity presents itself in the next year to 18 months. I say you have to weigh and make the best financial decision for you. Any advice would be greatly appreciated. The big risk you run with this strategy is the possibility of losing your job and having to pay the entire 401(k) loan … SHOULD YOU LOWER 401 (K) CONTRIBUTIONS TO PAY OFF DEBT? I would pay the minimum on the cc with the 2500 balance and throw all your extra money at the 7500 cc until it is paid off, Reasons why advise against taking a loan from your 401k-, If you lose or leave your job, you have 60 days to repay your loan. By using our Services or clicking I agree, you agree to our use of cookies. We have identified the overspending and plan to curb our current spending habits a great deal in the coming months (and on into the coming years). 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