topic Re: Withdraw from 401k to pay credit card debt in General Credit Topics

Withdraw from 401k to pay credit card debt

tianapb725 — Fri, 09 Oct 2009 14:41:32 GMT

I apologize if this isn't meant for this forum.

I'm 26 years old and currently have $10k in credit card debt. The majority was accumulated while I was in college and right after (I know it's bad, but I can't change it now). I feel as though I'm never going to get this debt paid off. I have $15K in my 401k plan and was wondering if anybody had any advice because I've been considering withdrawing the funds to pay off the debt. I've normally been able to keep it under control, but since the new credit card laws went into effect, my minimum payments have increased (I always paid more anyway) and also most of my interest rates have increased. I am already freelancing and putting that money into a savings/emergency fund and putting it towards the debt, but estimates say that the debt won't be paid off for another 6 years. I would like to start saving to eventually buy a condo/house in the future (certainly not anytime soon). I do not have problems paying the debt and have never missed a payment (730 score). I also currently max out my 401k at 6% with a company match of the full 6%.

I'm aware of the penalties involved. It will not bump me into a new tax bracket.

I'd really appreciate the feedback or hear if anybody's done this. I like these forums because people don't pass judgement.

Re: Withdraw from 401k to pay credit card debt

Anonymous — Fri, 09 Oct 2009 14:52:43 GMT

The CC APR's are hurting you and it is the interest rate (the cost of attaining and maintaining) credit which is killing you. In my opinion 10k is not bad compared to what else I have seen. Are your scores FICO or FAKO? Furthermore, how much do you make? How much disposable income do you have to allocate towards debt repayment (after paying ALL bills - rent, car payment, insurance, gas, electricity etc etc.)? I would recommend joining a CU and see if they will do a personal loan to you and that way you can eliminate the CC debt and have one low payment with your CU!

Good Luck!

Re: Withdraw from 401k to pay credit card debt

tianapb725 — Fri, 09 Oct 2009 14:59:59 GMT

I make $45K/year and thankfully have a secure job. My scores are actual FICO scores. I maybe have $50 left at the end of the money once bills are paid off (including credit cards). I usually pay another $50-100 on top of my minimum payment, which amounts to about $350-400/month. I save $150/month to put into an emergency fund, but it's not quite there yet so I don't want to stop contributing to that. Unfortunately, I already have a loan with my credit union as an auto loan, so I'm not sure if they'd be willing to give me more.

Re: Withdraw from 401k to pay credit card debt

Anonymous — Fri, 09 Oct 2009 15:04:02 GMT

An auto loan is a completely different product and thus that would just impact your DTI. It seems like you do have enough to be able to live with the payment that would come with a personal loan. You can always go with a different CU if you think that makes a difference. Your scores are strong but than what is your AAoA? You happen to have a decent income which is good but also how long have you been there? From my CU experience, a CU would be more than willing to work with you in getting a loan and getting those CC's paid off! They might just require you close the CC's. Can you list the CC's, the balance owed and the CL's?

Re: Withdraw from 401k to pay credit card debt

spiritcraft1 — Fri, 09 Oct 2009 15:16:37 GMT

Perhaps calling local CU's... yours and others to inquire about products would help. I would try not to drain the 401K...

Options:

You can borrow half of it with a 5 year payback without penalty which gets you halfway there...

My local CU offers stock/fund secured personal loans... that would be a question to ask your locals.

If you can get a loan (or borrow from your 401k) to pay these cards down or off your best bet would be to keep them open but to get in the habit of keeping them paid off. If that happened... you would likely be in the 800 club in short order... and that house / condo would be reality.

Re: Withdraw from 401k to pay credit card debt

tianapb725 — Fri, 09 Oct 2009 15:23:32 GMT

I've been at my employment for 3 years.

Balance/Credit Line

CitiCard $5,100/$13,500 APR 13.24%, increased from 9.99 to 19.99% when new laws went into effect, talked them into lowering it, my oldest card

Chase $3,900/$7,000 APR $15.99%, increased from fixed 8.99% to V 15.99, refuses to lower, would only close NO WAY! haha

BoA $1,500/$7,000 APR 9.99% fixed, no problems with APR

I also have other credit cards with $0 balances:

Amex CL $10,000

Juniper CL $3,100

NY&Co Store Card CL $1,100

Best Buy CL $8,000

Home Depot CL $2,400

Discover CL $3,000

Re: Withdraw from 401k to pay credit card debt

Anonymous — Fri, 09 Oct 2009 17:24:53 GMT

Hey,

Sorry am at work and had to drift away there but yeah it does not look like you are in that bad of shape. So as far as I can tell the only issue is with 5100 balance on the citi card and the chase for 3900. If you do decide to go on with a personal loan with a CU, they will require that you close cards that they are paying off to protect their investment and assure you wont get into debt again - so this maybe out of question considering CITI is your oldest and I am pretty sure you dont want to loose the available CL's. So, 9.99 you said is not bad on your BofA - if you dont wanan close the account - maybe you can do a BT to the BofA for the citi balance and with the chase maybe you could BT to AMEX if your rate is low (but than again, you never know with AMEX - proceed at your own risk). If it were me, I would BT to other newer cards and than do the personal loan so if the CU requires you close the card than you are still okay and not closing out your oldest cards. You know? This is just my opinion.

Good Luck

Re: Withdraw from 401k to pay credit card debt

mt2va — Fri, 09 Oct 2009 19:43:16 GMT

I know this will probably go against every one else's suggestions and I'm only agreeing with you because of the fact that at your age you still have time to contribute to your 401(k) before retirement. I would either look into gettting a loan if you can and the re-payment would be less than your monthly credit card payments you are currently making. If not then I would take the money out and pay the credit cards off as long as you know that you definately would not charge them up again. The money you are paying towards the monthly credit card payments you could then divert to paying extra into your 401(k) to make up for what you took out or include more in your emergency fund savings or other investments.

Re: Withdraw from 401k to pay credit card debt

tianapb725 — Fri, 09 Oct 2009 22:16:27 GMT

Thank you for your help. I really appreciate it! I'm not doing this anytime soon because I am weighing my options. I'm not taking it lightly, but if I do it, I'd probably do it after the New Year while in the new year, new state of mind theme, haha.

My Amex card's APR fluctuates now too during the law changes. It was 9.99% but it's 12.99% now. I'd rather not close any cards because of the history. Only two have been opened for about 2 years, all of the others about 5.

Re: Withdraw from 401k to pay credit card debt

Karatz — Fri, 09 Oct 2009 22:52:16 GMT

@tianapb725 wrote:
I apologize if this isn't meant for this forum.

I'm 26 years old and currently have $10k in credit card debt. The majority was accumulated while I was in college and right after (I know it's bad, but I can't change it now). I feel as though I'm never going to get this debt paid off. I have $15K in my 401k plan and was wondering if anybody had any advice because I've been considering withdrawing the funds to pay off the debt. I've normally been able to keep it under control, but since the new credit card laws went into effect, my minimum payments have increased (I always paid more anyway) and also most of my interest rates have increased. I am already freelancing and putting that money into a savings/emergency fund and putting it towards the debt, but estimates say that the debt won't be paid off for another 6 years. I would like to start saving to eventually buy a condo/house in the future (certainly not anytime soon). I do not have problems paying the debt and have never missed a payment (730 score). I also currently max out my 401k at 6% with a company match of the full 6%.

I'm aware of the penalties involved. It will not bump me into a new tax bracket.

I'd really appreciate the feedback or hear if anybody's done this. I like these forums because people don't pass judgement.

Just wanna let you know how, if this was my situation, my 401k would handle it. First, I doubt anyone would ever recommend withdrawing from your 401k in this situation. Second, go find out if your 401k handles loans and what the terms are.

My 401k, if it was15k, would be handled this way. I would be able to ask for half my 401k and I could pick the terms. In your case, I would pick the longest amount of time to pay, thus the lowest payment. This would allow for more free money to go toward your credit cards. 15k would give me 7.5k leaving me with 2500 in debt on the credit card.

Next I would figure out what I spend per month that could be put on a credit card. Charge it on an account with zero balance and put a lot of your cash (that you would otherwise spend) put it on the cards that are carrying a balance. Write out a spreadsheet on paper or computer and line all your cards up by due date. Figure out your income vs your due dates on your credit cards with zero balance. Basically what you want to do is stop charging on one card when you have just enough money coming so that when it is due you can pay in full. When you stop charging on that card, then start charging on the next card that would have the due date the farthest out, preferrably right after the statement date which buys you the most amount of free money time. Repeat and move to the next card.

Another angle you could add is to charge only on your lowest apr card making only the minimum payment on that, then take all your cash you would have otherwise spent and pay it on your card that has the highest interest rate. This effectively transfers balances from a high rate card to a low rate card and does it free. Once you achieve the tranfer, you can use your high rate card in the mix of the previous paragraph.

I personally am working full time while attending school part to full time. I am in your exact situation except of course I'm not done with school. Using the above technique, I am floating around about 1500 per month free of interest and my balance is on a 5.9% card. If they rate jack me, I'll move what I owe free to somewhere else. If I'm short, I have a few friends who will give me cash and I do their purchase so I then have enough to pay in full on the card that I just ran up a bit and needs to be paid in full to avoid finance charges.

I'm also a math tutor, and this is prime example where decent math skills can help you in real life. Who says you never use math in real life? LOL. If you were to have couple friends who would help you out giving you cash and you charging, you could easily float your entire remaining 2500 every month interest free. Use the interest you save to pay off the remaining 2500 faster. When it's done, put more into your emergency fund till that balance is enough to pay the 401k loan, then pay the 401k loan in full. Use the 401k ability for a loan as an emergency fund till you are able to replenish your emergency fund. My 401k only allows the monthly payment to be made or a payment in full.

Hope this at least helps in giving you an idea of what you can actually mathmatically do.

Re: Withdraw from 401k to pay credit card debt

Karatz — Fri, 09 Oct 2009 22:54:38 GMT

I forgot to add that my 401k charges me 4.1 percent which is added to the 401k balance, so basically, taking a loan on it is like changing your 401k to a fixed money market fund except for that it has a better rate. The cost for this for me is 50, and it is as safe an investment as you see yourself to be.

Re: Withdraw from 401k to pay credit card debt

haulingthescoreup — Sat, 10 Oct 2009 00:32:00 GMT

Because of your young age and your situation, this is one of the few times I would agree with hitting the 401K. But go with a loan, rather than cashing it out.

I don't know the tax consequences of a loan against your retirement funds --they could be equally dire --but I got slaughtered when I cashed in a small 401K from a former job to buy my daughter a car. Been there, done that, not ever doing that again.

Re: Withdraw from 401k to pay credit card debt

Anonymous — Sat, 10 Oct 2009 04:07:23 GMT

I do not think withdrawing money from your 401k is a good idea

1 DO NOT CASH OUT AS SOMEONE SUGGEST UNDER NO CIRCUMSTANCES

2 the market is down at this point and is growing yet so 15K will be a lot more when this financial mess is over.

3 you are young , true, that is why youth is on your side and withe the power of compound interest your 15K will double in 7 years and better yet even more since you" feed the beast" ie still contribute which means it will grow even faster.

4 Not that I am suggesting this, but you are moving protected money 401K to unsecured debt. do not do this to feel better about your self your score is excellent and you have learnt your lesson about money management. you did not aquire this in one year so give yourself time to undo the debt. Even people who file BK have time about 3 yrs to fulfil the debt . Pace yourself.

5 Get a second job for extra cash to pay this debt off

6 God forbid, but if you lose your job you owe the 401k and will need to pay it back within 30 -90 days of job loss or else uncle sam is after you.

7 my last resort is maybe you can contribute up to the 6% match then anthing after that cut back and use the money to pay off your debt.

8 Do not sell yourself short still inquire with your CU you sound very very resonsible and they will see the light in you and may agree to an unsecured lon for the full amt or at least half.

9 DO NOT BE DERAILED by this credit mess. continue to save cut back on CC use and use dinkytown.net calculator to see if you can managed to do this in 3years

best wishes

Re: Withdraw from 401k to pay credit card debt

haulingthescoreup — Sat, 10 Oct 2009 13:05:25 GMT

OK, I'm amending my response: Credit-Wise's answer was much more thorough and well-thought-out than mine.

+1

Re: Withdraw from 401k to pay credit card debt

marty56 — Sat, 10 Oct 2009 20:14:59 GMT

First off I would stop contributing to your 401k. I would then do that math and see if you could PIF your CC debt in 5 years or less. if not I would look into a DMP program which would lower your intrest rates and have the debt PIF in 5 years or less.

You could also get a 2nd job or possible EBay some stuff to get the CC debt down but I would not take the 401k loan out. Also if you are not vested in your retirement account, you may not have access to the full funds.