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How to survive an Amex Financial Review?

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NRB525
Super Contributor

Re: How to survive an Amex Financial Review?


@Chris679 wrote:

@Sevenfeet wrote:

@Chris679 wrote:

Paying off credit card debt at 20% APR with money from your 401k is like guaranteeing yourself 22% APY on that money. Anyone going to turn down a guaranteed 22% annual return on any investment?


Not sure I get the math on that.  Please explain.


Banks and credit card companies use Annual Percentage Rates for loans and Annual Percetage Yield for interest bearing accounts.  The subtle difference is that one factors in compounding of the interest and one does not.  By using APR they can make the rate seem lower when you are paying interest and by using APY they make is seem slightly higher.  Credit cards however can be slightly deceiving because they often compound the interest daily.  This means that the actual interest you pay is higher than the stated APR.  If your APR is 20% for example, you are are really paying 22% interest per year.

 

I'm not very familiar with 401K loans but from what I understand the rates are very low, like a few points above prime.  Any money you use to pay off credit debt at 20% APR is esentially getting you a 22% return because you are saving that amount in interest.  Of course you have to factor in the interest you are now paying on the 401k loan but that is minimal.  Lets use 6% as an example.  22-6=16% so that is the return you would have to be GUARANTEED just to break even by keeping the money in the 401k.  Could you beat 16%?  Of course you could but there is absolutely no way to guarantee that whereas that credit card interest that you are paying is 100% guaranteed.  

 

The math you are looking for is basically take the APR you are paying and add about 2%.  Then subtract the interest rate of any 401k loan that you want to take out.  The difference is the return you would need to get just to break even if you leave it in the 401k.  Any lower than that and you are costing yourself money and like I said the credit card interest is set in stone.  Even if you think you can come out ahead by leaving in the 401k there is no way to be sure.


+1

Or this in Excel, a Daily Compound Interest formula.

Put the interest rate in cell A1.

This formula goes in cell B1: =((1+(A1/365))^365)-1

 

If cell A1=19.24%, then B1=21.21%

 

It's a real motivator to pay off those high HIGH interest rate cards.

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Message 31 of 51
Sevenfeet
Regular Contributor

Re: How to survive an Amex Financial Review?

An update to this:  When I began this thread, I told everyone that Amex had given me a choice on my CLD ($20K->$6600)...either go through a full blown account review (income verification, tax statements, etc) or just pay half the balance within 60 days.  Given my wife's new job, that was technically possible so we decided to do the later.  I did the payment over the weekend and checked back with Amex on Tuesday to see if they needed anything else.  I was told that my credit line would be restored by 30 days but in reality, it took only 24 hours after that call to put things back to my original $20K limit.

 

So all's well that ends well and an interesting lesson on dealing with Amex for an issue like this.

Message 32 of 51
Anonymous
Not applicable

Re: How to survive an Amex Financial Review?


@Sevenfeet wrote:

An update to this:  When I began this thread, I told everyone that Amex had given me a choice on my CLD ($20K->$6600)...either go through a full blown account review (income verification, tax statements, etc) or just pay half the balance within 60 days.  Given my wife's new job, that was technically possible so we decided to do the later.  I did the payment over the weekend and checked back with Amex on Tuesday to see if they needed anything else.  I was told that my credit line would be restored by 30 days but in reality, it took only 24 hours after that call to put things back to my original $20K limit.

 

So all's well that ends well and an interesting lesson on dealing with Amex for an issue like this.


Glad to hear that it worked out for you in the end.

Message 33 of 51
Sevenfeet
Regular Contributor

Re: How to survive an Amex Financial Review?


@Anonymous wrote:

@Sevenfeet wrote:

An update to this:  When I began this thread, I told everyone that Amex had given me a choice on my CLD ($20K->$6600)...either go through a full blown account review (income verification, tax statements, etc) or just pay half the balance within 60 days.  Given my wife's new job, that was technically possible so we decided to do the later.  I did the payment over the weekend and checked back with Amex on Tuesday to see if they needed anything else.  I was told that my credit line would be restored by 30 days but in reality, it took only 24 hours after that call to put things back to my original $20K limit.

 

So all's well that ends well and an interesting lesson on dealing with Amex for an issue like this.


Glad to hear that it worked out for you in the end.


Yes.  Now it's time to snowball the rest of the credit card debts of the past year now that my wife is working again.  It'll take awhile but we're happy to get started.

Message 34 of 51
ojefferyo
Valued Contributor

Re: How to survive an Amex Financial Review?

I wonder if they always offer that you pay half of your bill or do a FR to restore the CL

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Message 35 of 51
skigirl916
Established Contributor

Re: How to survive an Amex Financial Review?


@Sevenfeet wrote:

@red259 wrote:



I'm a bit confused. What do you mean by 120k debt? You started with 140k in credit. How much are you carrying month to month? How long have you been carrying the debt for? How long have you been paying interest on your credit card debt? Has there been any AA on cards where you carried a balance with 0%apr? How much were you paying on the cards you carrying a balance on per month? 


We started with a little less than $40K of debt and racked up another $80K in a 16 month period while my wife was looking for work.  So instead of working our way down, we continued our spending patterns for the first six months and then started dialing back after that.  But some of our debt was on 0% arrangements that ended (Penfed, Citi) and when that happened, it was a tipping point that made the current situation worse.  My plan is to reel it back in over a period of 2+ years....the first 6 months will be the toughest but if we can stay with the plan, it will get easier then and get much easier at this time next year.


Okay, so it is $120K in debt on these cards out of $140K. 

 

Frankly, I'm surprised that you didn't experience more AA from other banks. 

 

This is a scary situation to find yourself in.  I hope you bail out of it soon!

Message 36 of 51
Anonymous
Not applicable

Re: How to survive an Amex Financial Review?


@Chris679 wrote:
OP it's time to start making smart financial choices and that means paying off highest APRs first so you can get out of the hole. Let them slash your CL, who cares. You are going to stop using this card because you have no grace period if you carry a balance. You stated this is your go to grocery card which means you are digging yourself deeper every time you use it by paying interest on your groceries from the moment you buy them! From now on you need to use cash for all purchases unless you have a card that you PIF.

You can get the limits reinstated once everything is paid off.

+1000000....this is a simple and smart solution.  Pay with cash for your day to day....pay down high interest CCs.  Forget about Credit Limits and credit cards for now.....those will take care of themselves once you have gotten to a better place financially.  A credit Limit is just not that important

Message 37 of 51
Sevenfeet
Regular Contributor

Re: How to survive an Amex Financial Review?


@skigirl916 wrote:

@Sevenfeet wrote:

@red259 wrote:



I'm a bit confused. What do you mean by 120k debt? You started with 140k in credit. How much are you carrying month to month? How long have you been carrying the debt for? How long have you been paying interest on your credit card debt? Has there been any AA on cards where you carried a balance with 0%apr? How much were you paying on the cards you carrying a balance on per month? 


We started with a little less than $40K of debt and racked up another $80K in a 16 month period while my wife was looking for work.  So instead of working our way down, we continued our spending patterns for the first six months and then started dialing back after that.  But some of our debt was on 0% arrangements that ended (Penfed, Citi) and when that happened, it was a tipping point that made the current situation worse.  My plan is to reel it back in over a period of 2+ years....the first 6 months will be the toughest but if we can stay with the plan, it will get easier then and get much easier at this time next year.


Okay, so it is $120K in debt on these cards out of $140K. 

 

Frankly, I'm surprised that you didn't experience more AA from other banks. 

 

This is a scary situation to find yourself in.  I hope you bail out of it soon!


The situation was getting scary.  The whole game with CLIs two years ago as a result of being on this board originally was just to boost credit scores.  I didn't imagine actually having to live off of it, much less for the 16 months my wife was looking for work.

 

It's not like I haven't had some inquiries.  BofA did one recently but no action.  I said earlier that Citi had done a CLD on me ($9000->$7500) but that was minor on a card I didn't really care about much.  But I was more concerned about American Express and the 25 year relationship I had with them.  No CLDs and a good credit experience with them over a long period of time. And the Amex BCP was the last card that I wasn't close to the limit.   I've never missed a payment on any of my cards, which is the one thing keeping my credit scores above 700 right now.

 

Anyway, with the extra income, my wife and I will be reeling these back in over the next two years.  We'll begin with the US Bank Cash+ and Discover cards since they have the worst interest rates of the bunch and then move to the others.

Message 38 of 51
Creditaddict
Legendary Contributor

Re: How to survive an Amex Financial Review?

People that think you are paying yourself interest for taking out a 401k loan are confused!

yes you may technichally be paying yourself 5.25% interest on money borrowed but you are LOOSING 5 years of compounding interest on your entire portfolio... not to mention to pay UNSECURED DEBTS is just CRAZY TALK!

If OP needs a solution outside of regular payments to the credit card which by $80k in 16 months looks like a yes, you should both enter a credit counseling firm and pay them over 5 years and get the debt gone at near 0% and then you won't be robbing your 401k and you will still come out with prestine credit in the end.

Don't touch a 401k... don't do it don't do it!

Message 39 of 51
syeb
Regular Contributor

Re: How to survive an Amex Financial Review?


@Creditaddict wrote:

People that think you are paying yourself interest for taking out a 401k loan are confused!

yes you may technichally be paying yourself 5.25% interest on money borrowed but you are LOOSING 5 years of compounding interest on your entire portfolio... not to mention to pay UNSECURED DEBTS is just CRAZY TALK!

If OP needs a solution outside of regular payments to the credit card which by $80k in 16 months looks like a yes, you should both enter a credit counseling firm and pay them over 5 years and get the debt gone at near 0% and then you won't be robbing your 401k and you will still come out with prestine credit in the end.

Don't touch a 401k... don't do it don't do it!


With all due respect I believe you are very mistaken with this advice which should be characterized as "Crazy Talk". Yes CC balances are unsecured debts, but at extremely high interest rates, and the OP does not indicate the BK is an option, nor should it be in this situation. Unsecured doesn't mean that you don't have to pay. It just means that it is not secured by assets.

 

So assuming he wants to pay off the debt, borrowing $50k from a 401k and paying himself interest at a minimal rate, would save tens of thousands in interest for that portion of the debt, over the 5 year timeframe. Talk about compounding! And the interest that he does pay will be to his own retirement.

 

The only drawback from a 401k loan in this sutiation is the fact that if he leaves the job it would need to be paid in full or be treated as an early distribution.

 

Even a credit counseling firm cannot bring all rates to zero 0 they will generally get them between 2% and 10%. So overall, he will come out ahead with the 401k loan, especially considering he is paying interest to himself.

 

And yes a 401k loan is the most underused, incredibly useful option for getting out of CC debt around - assuming the employment is secure. Do touch it! Do touch it!

Message 40 of 51
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