Hello, thank you for some sound advise. I'm recently divorced and trying to rebuild my personal and financial life. I need to payoff my credit card debt as it holds the key for me to be able to invest in RE. I'm financially stable with a Job and 700+ credit score but I've got too much cc debt. I've considered borrowing from my 401k (IRA) or looking into a personal loan. However I've read and heard the arguments against such. With the snowball approach to paying off debt in my case the difference between the minimum payments and what I was actually paying isn't much @ $200.00. at the end of my current rental lease I plan on moving into a cheaper place so that will help as well. What other options are out there for restructuring CC debt?
There may be some here who will disagree with me, but I'm a fan of borrowing from the 401k for something like paying off credit cards and here's why. It is unlikely you're earning anywhere near the interest rate you're paying on your credit cards. If you pay off your cards, then turn around and put the money you were paying each month on the CC's toward paying off the 401k, then you're probably going to be ahead in the ballgame, with the added benefit of raising your credit score. I completely agree with Dave Ramsey's debt snowball approach, but that is generally for people with loads of CC debt who also have no other liquid or semi-liquid assets. With an accessible 401k, you have semi-liquid funds.
@Karenga Smith - I absolutely agree with Hattie. They say only borrow against your 401(k) in emergency situations.... credit card debt is an emergency situation! If something catastrophic happens and you have already accessed your 401(k), then you resort to credit cards or some sort of personal loan.
Assuming you're paying double-digit interest on your credit cards, I don't have a problem borrowing against the 401K...HOWEVER...
Make damn sure you understand the terms of the loan and that you will be able to meet those terms for repayment. If you don't, Uncle Sam will charge you much more in taxes than the credit card interest you're trying to save.
My advice would be dependant on your future plans. I would suggest you borrow providing you never use the card again unless you have the cash available to pay off the card completely at the end of every month.
A credit card should only be used as a convenience when the user has the cash to pay it off before any interest is due. Never use a credit card to pay for something you can not afford to pay for with cash. Better yet put the CC away and only use debet cards to purchase.
Thank you one and all for taking the time to respond to my question. I have much to ponder on.
If you have total control of your spending, try opening additional credit cards. You can find some free balance transfers and 0% interest for the first x months. If you don't qualify for these look for cards with interest rates significantly lower than yours and transfer the balances. You have to watch out for balance transfer fees and weight these against your current charges. To come up with the best options it takes a bit of research, but if your cards are in the 27% range you can pay the cards down much faster with 0, 12.95, or 17% interest cards.
I personally would not touch a 401K except if your debt is very high and you are not qualifying for low or no interest cards.
As someone mentioned about cutting down on your living expenses and creating a budget, I highly recommend going to the YNAB forum boards. Purchase the sofatware to budget. It will teach you so much on handling your finances and paying off debt. The software is around 60 bucks or so. I can’t remember. A lot of great information there people in your situation. YNAB is You Need A Budget. The difference in this budgeting software than others, is that you learn a lot better with hands on experience by tracking and understanding how you can manage your money all the way down to the cent.