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Henri66
Posts: 2
Registered: ‎05-04-2008
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Borrowing from 401k affect credit score?

I'm looking to purchase a house soon. However, i do have a CC debt of about 25k, which has been keeping my score down (below 700). I have a 401k worth about 200k and a stable occupation. I m looking to get a boost in my Credit score and qualify for a cheaper loan; does it make sense for me to borrow from my 401k and pay down my CC debt? Does this money borrowed from 401k have a negative effect on my Credit score and on my ability to get a mortgage loan?

I would appreciate any comments, thoughts, concerns, issues that might arise from this.

Henri
Established Member
ScoresUP
Posts: 21
Registered: ‎05-23-2008
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Re: Borrowing from 401k affect credit score?

Henri66 - Loans are when you will repay what you have taken out of your 401K without having to pay the penalties or taxes on it because you are repaying it. If you withdraw this is taking the money from the plan this option is where you must then pay taxes as well as penalties. Some financial folks disagree with taking loans from your 401K because until you fully repay the loan it temporarily reduces your investing amount but I think of it this way, if you are in need of the money to pay off HIGH Interest CC debt just as I did why would I go to a bank for a loan when I am in a since borrowing from myself and paying MYSELF back with interest to my plan.

 

So to answer your question, a “loan” from your 401K plan SHOULD not go on your credit in any way. This will come right back out of your payroll check.

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llecs
Posts: 32,869
Registered: ‎08-04-2007
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Re: Borrowing from 401k affect credit score?



Henri66 wrote:
I'm looking to purchase a house soon. However, i do have a CC debt of about 25k, which has been keeping my score down (below 700). I have a 401k worth about 200k and a stable occupation. I m looking to get a boost in my Credit score and qualify for a cheaper loan; does it make sense for me to borrow from my 401k and pay down my CC debt? Does this money borrowed from 401k have a negative effect on my Credit score and on my ability to get a mortgage loan?

I would appreciate any comments, thoughts, concerns, issues that might arise from this.

Henri

To echo previous comment, borrowing against the 401(k) won't have an impact as an account on your score, because no acct would be generated.
 
However, don't borrow against your 401(k). Here's why:
 
If you take from your 401(k) to pay CC debt and don't pay it back within the next couple months, you'll likely have a 10% penalty. On top of that, assuming a decent tax rate, you might have to pay 30% in top of that in tax penalties. So, that $25,000 now will cost you $35,000. Unless your CC rates are above 40%, it would be advisable not to touch it, otherwise you'd end up throwing away money.
 
On the flip-side, you'll now have some unrealized losses due to the $25k withdraw. Assuming your 401(k) grows at a slow 12%, within the next 5 years, without adding anything to that $25k, your investment grows to $44,059. Had you not taken the money and kept it in for an additional 10 years, your $25k would have grown to $77,646. For 15 years....$136,839. For 25....$425,002. I don't know your age, but for 40 years from now......$2,326,274....I don't know what you are invested in either, but with a good planner 12% on average is do-able. Even at half that at 6% for 40 yrs that would have cost you $257,143.
 
I know that on the surface 20% interest rates on your CCs (assuming a tad high) don't compare to 12% gains, but the taxes and fees makes this not very cost effective. You could always reduce or suspend your contributions (assuming no matching). Or pull from a non-401(k) or non-IRA account to pay this off.
 
My 2 cents anyway.
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ScoresUP
Posts: 21
Registered: ‎05-23-2008
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Re: Borrowing from 401k affect credit score?

NO TAX or Penalties on a loan since you are repaying only a withdrawl where you would not be repaying. Only if you voluntarily or involunterily leave your job.
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llecs
Posts: 32,869
Registered: ‎08-04-2007
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Re: Borrowing from 401k affect credit score?



ScoresUP wrote:
NO TAX or Penalties on a loan since you are repaying only a withdrawl where you would not be repaying. Only if you voluntarily or involunterily leave your job.


You are right. If you repay before age 59.5 or before a max of 5 years or whatever the terms of the loan schedule is, you don't have to pay the tax and penalties.
 
However, you do have to pay taxes on the income you use to repay that loan. Any deduction out of your paycheck must come out after you pay taxes on it. If you are scheduled to pay $400 a month (OP, your monthly payment would be greater than that), the $400 doesn't come out of your paycheck prior to the tax calculations, it comes out after the tax calculations. Therefore, in order to pay $400 at a 30% tax rate, you are really paying $520 with the difference going to withholding.
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fishbjc
Posts: 3,439
Registered: ‎11-30-2007
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Re: Borrowing from 401k affect credit score?

If you take from your 401(k) to pay CC debt and don't pay it back within the next couple months, you'll likely have a 10% penalty. On top of that, assuming a decent tax rate, you might have to pay 30% in top of that in tax penalties. So, that $25,000 now will cost you $35,000. Unless your CC rates are above 40%, it would be advisable not to touch it, otherwise you'd end up throwing away money.
 
 
Each individual plan varies.  DH's old company allowed loans (hardship or otherwise) for up to five years at 4% interest, payroll deduction.  DH's new company only allows hardship loans, and will not let you make further contributions for six months. 
 
My friend took out a loan from her 401k and left her position.  They allowed her to continue to pay off the loan.  Our loan note was due within 90 days, in full.
 
YMMV~read your plan carefully, then discuss it with the plan advisor.
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demi
Posts: 852
Registered: ‎09-18-2007
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Re: Borrowing from 401k affect credit score?

Does not report.  In some ways, wish it did, would help on rebuilding your credit score, but on the other side, doesn't count either.  When you think about it, we have already received the tax benefit, so it makes sense that anything to repay would not be tax free.  I took one out to pay off some back taxes...oh, and repayment does not come out of my paycheck (I wish, would be easier), I send a check each month (Hartford). 

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firstinlastout
Posts: 339
Registered: ‎12-12-2007
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Re: Borrowing from 401k affect credit score?

don't borrow from your 401K !! rule # 1!
God is keeping score....be good to others.
New Member
Henri66
Posts: 2
Registered: ‎05-04-2008
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Re: Borrowing from 401k affect credit score?

Thanks a lot for all the answers. Here are the things i remember from all the responses:
-Borrowing from the 401k does not affect my credit (FICO) score.
-Need to check with my plan provider about the terms and conditions of borrowing from 401k.
-As a general rule, it is not recommended to borrow from 401k, because of potential taxes, loss of income at retirement.
-Borrowing from a 401k could also have some benefits, if handled properly. (i.e. pay high CC debt and work out a plan to return the money as fast as possible into the plan)

Looking at my particular situation, it seems to me that, there are some other factors that have to be considered, when making that decision. The main reason i wanted to explore this avenue in the first place was the ability for me to give an immediate boost to my credit score, which will in turn allow me to borrow money at a much cheaper rate.
Having a .5 - 1.00 percentage point difference on a 15 or 30 year mortgage can also save me lots of money in the long run. Even though i might be losing some in my 401k, i think I'm upsetting some in interests paid on my mortgage, because of the lower interest rate.
I have looked at my 401k plan, and i can reimburse the money within a 5 years window. However, I'm looking to do it within 12-18 months. Which should alleviate the losses i might incur, by taking the money out in the first place.

Considering the factors i have just outlined and the particularity of my situation, does anyone see a flaw in my thinking? Are there other factors i have not considered? I know, i need to ultimately sit down with a calculator and run through some numbers to weight the options.
Thanks again for your input.
Super Contributor
marty56
Posts: 5,696
Registered: ‎10-06-2007
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Re: Borrowing from 401k affect credit score?

My Roth IRA is loosing money so I might be tempted to do what you are doing.  They only thing I would say is that you need stay out of debt so you dont wind up with the debt back.  The goal would be to pay that money back as quickly as you can,.
 
 
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