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Using 401k Loan to pay off CC debt?

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IWOL
Established Contributor

Using 401k Loan to pay off CC debt?

I'm thinking about taking a loan from my 401k to pay off some CC debt. I'm 38 years old. I have 70k in my 401k.

 

i have been steadily paying down my debt but i currently have around 32% Util and I'm eager to get it down to 5% so I can maximize my scores.

 

my total debt is around $13000 and breaks down like this:

 

Wells Home Project Visa $7200 balance......this was to finance a new air conditioner. Interest rate is 9.9%

Lowes - $800.....this is at 0% until 5/2014

Amazon -$1300....0% until 7/2104

US Bank Platinum - $2000......  0% until 10/2014

Discover IT - $1200....0% until 12/2014

Best  Buy Card- 1200....0% until 6/2014

 

I can throw about $800 a month at this debt from my income so I can get it paid off over the next 10 to 15 months obviously paying off the 0% cards before term expires but I'm getting declined for CLI requests now mostly due to my Util of 32% and too many cards reporting a balance.

 

i really want to try and get an increase on my US Bank Platinum and try to PC it to Cash plus. I've had it 6 months now but I don't think score is high enough(TU 686) and I want to have the best shot with low Util. I was also getting steady increases on my GE accounts but recently been denied for Util and too many balances. 

 

if I take a loan for $13000 it would be less than 20% of my total 401k  and I could pay the 13 k back over 16 months without affecting my current contributions to my 401k.

 

 

I could also wait another 6 months and continue to pay down the debt and take a smaller loan at that time to pay off the rest. My plan is to apply in June for an Amex revolver, probably Jet  Blue or Delta as well as Chase Freedom or CSP.  i will have to see where my scores are at that time to see if they are in the right place.

 

My current profile is AAoA of 2.8 years. Ficos are EX 662, EQ 690 and TU 682. I have a pretty thick file with 27 accounts, 18 open and 9 closed. 

 

trying to plan the best course of action.  Is it worth taking the loan to try and reach my goal faster or should I just continue paying down balances and give it more time.

 

The end goal for me is to have a few prime cards that I can use to better maximize my rewards. Right now I mostly use my Dicover It and B of A 123 to get as much as I can out of my monthly spending. Would be nice to get some of the great sign up bonuses too.


Message 1 of 16
15 REPLIES 15
sailor_mercury
Valued Contributor

Re: Using 401k Loan to pay off CC debt?


@IWOL wrote:

I'm thinking about taking a loan from my 401k to pay off some CC debt. I'm 38 years old. I have 70k in my 401k.

 

i have been steadily paying down my debt but i currently have around 32% Util and I'm eager to get it down to 5% so I can maximize my scores.

 

my total debt is around $13000 and breaks down like this:

 

Wells Home Project Visa $7200 balance......this was to finance a new air conditioner. Interest rate is 9.9%

Lowes - $800.....this is at 0% until 5/2014

Amazon -$1300....0% until 7/2104

US Bank Platinum - $2000......  0% until 10/2014

Discover IT - $1200....0% until 12/2014

Best  Buy Card- 1200....0% until 6/2014

 

I can throw about $800 a month at this debt from my income so I can get it paid off over the next 10 to 15 months obviously paying off the 0% cards before term expires but I'm getting declined for CLI requests now mostly due to my Util of 32% and too many cards reporting a balance.

 

i really want to try and get an increase on my US Bank Platinum and try to PC it to Cash plus. I've had it 6 months now but I don't think score is high enough(TU 686) and I want to have the best shot with low Util. I was also getting steady increases on my GE accounts but recently been denied for Util and too many balances. 

 

if I take a loan for $13000 it would be less than 20% of my total 401k  and I could pay the 13 k back over 16 months without affecting my current contributions to my 401k.

 

 

I could also wait another 6 months and continue to pay down the debt and take a smaller loan at that time to pay off the rest. My plan is to apply in June for an Amex revolver, probably Jet  Blue or Delta as well as Chase Freedom or CSP.  i will have to see where my scores are at that time to see if they are in the right place.

 

My current profile is AAoA of 2.8 years. Ficos are EX 662, EQ 690 and TU 682. I have a pretty thick file with 27 accounts, 18 open and 9 closed. 

 

trying to plan the best course of action.  Is it worth taking the loan to try and reach my goal faster or should I just continue paying down balances and give it more time.

 

The end goal for me is to have a few prime cards that I can use to better maximize my rewards. Right now I mostly use my Dicover It and B of A 123 to get as much as I can out of my monthly spending. Would be nice to get some of the great sign up bonuses too.


I'm not advising you...  Here is what I would do personally..

 

I wouldn't touch my 401k and here is why...

 

1) Your 401k is setup for your retirement, anything you pull out now reduces the growth of your fund.  So let's say your 401k is doing well and has a 10% rate of return (mine happens to be earning 16% over the last two years).  Any amount you borrow is not earning you money, yes you are paying yourself back but at a significantly lower rate.  I'm assuming you're under 50 so keeping the money in your 401k is paramount for the accumulated growth.  So you may be costing yourself much more than you realize.  As a general rule 401ks should be hands off, period.  Let them grow.  Only reach in there if it's a dire emergency and better credit cards and rewards isn't a dire emergency.

 

2) A little less than half of the debt is at 0%.  You're not paying rediculiously high interest rates.  Make a plan where you pay off the 0%-ers right around the time they are due.  Why take money out of your 401k and have it stop earning on your behalf just so you can pay debt that doesn't have interest at this time. 

 

3) The reasons for better rewards and better cards might not do you as much good as you think.  Those cards and rewards will still be there in 10 months.  If you put $800/mo against that debt in 10 months that will be down to $5k + interest on the one interest bearing card.  How much in rewards do you really think you will earn in 10 months?  Is it really worth risking your 401k which is a long term investment for a few cards that you will be able to get in less than a year?

NFCU nCashRewards VISA - $20,000 | NFCU nRewards $10,000
AMEX Costco TrueEarnings $5,000 | AMEX Delta Gold $1,500
Chase SWA VISA $5,000 | Chase Slate $3,500 | Chase Amazon Rewards VISA $3,000
HSN Mastecard $3,500
Message 2 of 16
Darrell82
Established Contributor

Re: Using 401k Loan to pay off CC debt?


@sailor_mercury wrote:

@IWOL wrote:

I'm thinking about taking a loan from my 401k to pay off some CC debt. I'm 38 years old. I have 70k in my 401k.

 

i have been steadily paying down my debt but i currently have around 32% Util and I'm eager to get it down to 5% so I can maximize my scores.

 

my total debt is around $13000 and breaks down like this:

 

Wells Home Project Visa $7200 balance......this was to finance a new air conditioner. Interest rate is 9.9%

Lowes - $800.....this is at 0% until 5/2014

Amazon -$1300....0% until 7/2104

US Bank Platinum - $2000......  0% until 10/2014

Discover IT - $1200....0% until 12/2014

Best  Buy Card- 1200....0% until 6/2014

 

I can throw about $800 a month at this debt from my income so I can get it paid off over the next 10 to 15 months obviously paying off the 0% cards before term expires but I'm getting declined for CLI requests now mostly due to my Util of 32% and too many cards reporting a balance.

 

i really want to try and get an increase on my US Bank Platinum and try to PC it to Cash plus. I've had it 6 months now but I don't think score is high enough(TU 686) and I want to have the best shot with low Util. I was also getting steady increases on my GE accounts but recently been denied for Util and too many balances. 

 

if I take a loan for $13000 it would be less than 20% of my total 401k  and I could pay the 13 k back over 16 months without affecting my current contributions to my 401k.

 

 

I could also wait another 6 months and continue to pay down the debt and take a smaller loan at that time to pay off the rest. My plan is to apply in June for an Amex revolver, probably Jet  Blue or Delta as well as Chase Freedom or CSP.  i will have to see where my scores are at that time to see if they are in the right place.

 

My current profile is AAoA of 2.8 years. Ficos are EX 662, EQ 690 and TU 682. I have a pretty thick file with 27 accounts, 18 open and 9 closed. 

 

trying to plan the best course of action.  Is it worth taking the loan to try and reach my goal faster or should I just continue paying down balances and give it more time.

 

The end goal for me is to have a few prime cards that I can use to better maximize my rewards. Right now I mostly use my Dicover It and B of A 123 to get as much as I can out of my monthly spending. Would be nice to get some of the great sign up bonuses too.


I'm not advising you...  Here is what I would do personally..

 

I wouldn't touch my 401k and here is why...

 

1) Your 401k is setup for your retirement, anything you pull out now reduces the growth of your fund.  So let's say your 401k is doing well and has a 10% rate of return (mine happens to be earning 16% over the last two years).  Any amount you borrow is not earning you money, yes you are paying yourself back but at a significantly lower rate.  I'm assuming you're under 50 so keeping the money in your 401k is paramount for the accumulated growth.  So you may be costing yourself much more than you realize.  As a general rule 401ks should be hands off, period.  Let them grow.  Only reach in there if it's a dire emergency and better credit cards and rewards isn't a dire emergency.

 

2) A little less than half of the debt is at 0%.  You're not paying rediculiously high interest rates.  Make a plan where you pay off the 0%-ers right around the time they are due.  Why take money out of your 401k and have it stop earning on your behalf just so you can pay debt that doesn't have interest at this time. 

 

3) The reasons for better rewards and better cards might not do you as much good as you think.  Those cards and rewards will still be there in 10 months.  If you put $800/mo against that debt in 10 months that will be down to $5k + interest on the one interest bearing card.  How much in rewards do you really think you will earn in 10 months?  Is it really worth risking your 401k which is a long term investment for a few cards that you will be able to get in less than a year?


sailor_mercury has a very good point. Your 401k is your life line ounce you retire. And right now is a very very bad time to take a investment out because things are doing very well in the investment world.

 

BUT, i am one to look at how i can save money now.

 

 Paying the Interest on the one card is what gets me to think I would get the loan to pay that card alone. Why because atleast in your 401k you are paying yourself back in interest which will make a little difference in what you lost in taking the loan out. But i would think if you could get the cards paid off and ounce you get the loan in your 401k paid off you can double up on your contribution ammount so that you can get back on track being you just freed up$ 800 dollars a month.

 

Good luck and hope everything works out for you.




Message 3 of 16
sailor_mercury
Valued Contributor

Re: Using 401k Loan to pay off CC debt?

I should add that if you switch jobs or get laid off before the 401k loan is paid off you either have to pay the loan in full or the balance of the loan gets recorded as an early withdrawl which means penalties and interest. 

 

Just another risk to keep in mind.

NFCU nCashRewards VISA - $20,000 | NFCU nRewards $10,000
AMEX Costco TrueEarnings $5,000 | AMEX Delta Gold $1,500
Chase SWA VISA $5,000 | Chase Slate $3,500 | Chase Amazon Rewards VISA $3,000
HSN Mastecard $3,500
Message 4 of 16
Darrell82
Established Contributor

Re: Using 401k Loan to pay off CC debt?


@sailor_mercury wrote:

I should add that if you switch jobs or get laid off before the 401k loan is paid off you either have to pay the loan in full or the balance of the loan gets recorded as an early withdrawl which means penalties and interest. 

 

Just another risk to keep in mind.


+ 1 Very good point indeed. 




Message 5 of 16
sailor_mercury
Valued Contributor

Re: Using 401k Loan to pay off CC debt?

Sorry! That should be taxes not interest.

See what happens when I'm up past my bedtime. Lol!
NFCU nCashRewards VISA - $20,000 | NFCU nRewards $10,000
AMEX Costco TrueEarnings $5,000 | AMEX Delta Gold $1,500
Chase SWA VISA $5,000 | Chase Slate $3,500 | Chase Amazon Rewards VISA $3,000
HSN Mastecard $3,500
Message 6 of 16
enharu
Super Contributor

Re: Using 401k Loan to pay off CC debt?

Other posters have brought forward very good points, and I agree you shouldn't touch your 401k.

Just to add something:

Check the T&C of your current cards, especially store cards. Store cards usually have 0% promo for a specific period of time, but if the original balance isn't paid down by the time the promo ends, you will be charged the entire "0% promo" duration worth of interests. If your current balance are due to new charges, then ignore my comments. Otherwise, best to pay them down ASAP (or at least as many cards as you can), or else you will be charged with several hundred dollars worth of interests.
JPMorgan Palladium (100k), AmEx Platinum (NPSL), AmEx SPG (46k), AmEx BCP (42k), Chase Sapphire Preferred (47k), Citi Prestige (31k), Citi Thank You Preferred (27k), Citi Executive AAdvantage (25k), JPMorgan Ritz-Carlton (21k), Merrill+ (15k), US Bank Cash+ (22.5k), Wells Fargo (12k), Bloomingdale’s (12.4k), Chase Freedom (5k), Discover IT (5k).
Message 7 of 16
OhioCPA
Frequent Contributor

Re: Using 401k Loan to pay off CC debt?


@sailor_mercury wrote:

I should add that if you switch jobs or get laid off before the 401k loan is paid off you either have to pay the loan in full or the balance of the loan gets recorded as an early withdrawl which means penalties and interest. 

 

Just another risk to keep in mind.


Not true with all plans. Some plans allow for direct payment of the loan after separation from service. At a minimum he would have a grace period, probably at least three months to pay it off.

________________________________________________________________________________
Message 8 of 16
weehoo
Frequent Contributor

Re: Using 401k Loan to pay off CC debt?

I switched jobs while having a 401k loan out, i was not even given the option to pay, was just marked as a early withdrawal taxed at 40%-50% (or something horrible like that).  Just an FYI

Citi AAdvantage WE - 41k | Marriott Bonvoy Brilliance - 29k | Citi Double Cash - 19 .5k | Southwest Premier - 39k | Discover Miles - 23k | GECRB Ebates Visa - 10k | Golden1 Rewards - $10k | Ducks Unlimited - 6k |
Message 9 of 16
Rikku
Regular Contributor

Re: Using 401k Loan to pay off CC debt?


@sailor_mercury wrote:

@IWOL wrote:

I'm thinking about taking a loan from my 401k to pay off some CC debt. I'm 38 years old. I have 70k in my 401k.

 

i have been steadily paying down my debt but i currently have around 32% Util and I'm eager to get it down to 5% so I can maximize my scores.

 

my total debt is around $13000 and breaks down like this:

 

Wells Home Project Visa $7200 balance......this was to finance a new air conditioner. Interest rate is 9.9%

Lowes - $800.....this is at 0% until 5/2014

Amazon -$1300....0% until 7/2104

US Bank Platinum - $2000......  0% until 10/2014

Discover IT - $1200....0% until 12/2014

Best  Buy Card- 1200....0% until 6/2014

 

I can throw about $800 a month at this debt from my income so I can get it paid off over the next 10 to 15 months obviously paying off the 0% cards before term expires but I'm getting declined for CLI requests now mostly due to my Util of 32% and too many cards reporting a balance.

 

i really want to try and get an increase on my US Bank Platinum and try to PC it to Cash plus. I've had it 6 months now but I don't think score is high enough(TU 686) and I want to have the best shot with low Util. I was also getting steady increases on my GE accounts but recently been denied for Util and too many balances. 

 

if I take a loan for $13000 it would be less than 20% of my total 401k  and I could pay the 13 k back over 16 months without affecting my current contributions to my 401k.

 

 

I could also wait another 6 months and continue to pay down the debt and take a smaller loan at that time to pay off the rest. My plan is to apply in June for an Amex revolver, probably Jet  Blue or Delta as well as Chase Freedom or CSP.  i will have to see where my scores are at that time to see if they are in the right place.

 

My current profile is AAoA of 2.8 years. Ficos are EX 662, EQ 690 and TU 682. I have a pretty thick file with 27 accounts, 18 open and 9 closed. 

 

trying to plan the best course of action.  Is it worth taking the loan to try and reach my goal faster or should I just continue paying down balances and give it more time.

 

The end goal for me is to have a few prime cards that I can use to better maximize my rewards. Right now I mostly use my Dicover It and B of A 123 to get as much as I can out of my monthly spending. Would be nice to get some of the great sign up bonuses too.


I'm not advising you...  Here is what I would do personally..

 

I wouldn't touch my 401k and here is why...

 

1) Your 401k is setup for your retirement, anything you pull out now reduces the growth of your fund.  So let's say your 401k is doing well and has a 10% rate of return (mine happens to be earning 16% over the last two years).  Any amount you borrow is not earning you money, yes you are paying yourself back but at a significantly lower rate.  I'm assuming you're under 50 so keeping the money in your 401k is paramount for the accumulated growth.  So you may be costing yourself much more than you realize.  As a general rule 401ks should be hands off, period.  Let them grow.  Only reach in there if it's a dire emergency and better credit cards and rewards isn't a dire emergency.

 

2) A little less than half of the debt is at 0%.  You're not paying rediculiously high interest rates.  Make a plan where you pay off the 0%-ers right around the time they are due.  Why take money out of your 401k and have it stop earning on your behalf just so you can pay debt that doesn't have interest at this time. 

 

3) The reasons for better rewards and better cards might not do you as much good as you think.  Those cards and rewards will still be there in 10 months.  If you put $800/mo against that debt in 10 months that will be down to $5k + interest on the one interest bearing card.  How much in rewards do you really think you will earn in 10 months?  Is it really worth risking your 401k which is a long term investment for a few cards that you will be able to get in less than a year?


^ This is EXACTLY what I was going to say.

Message 10 of 16
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