Using 401k Loan to pay off CC debt?

[brianjb]

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@sailor_mercury wrote:

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@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.

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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?

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+1

[Repo-ed]

Though I agree 100% w/ what is above, I will say I just did exactly this.

I've now taken out my 3rd 401k loan in 6 years which has been netting me an avg of 18%/yr (the 401k that is)

The first 2 loans have long been paid-off with my last one having been taken this past december.  After loan, my YOY was 17%.

I'm not saying this as ANYWAY to jusitfy MY actions.  If anything, I wish I didn't put myself in to a debt situation that made me touch it, as I know my YOY would be even higher.

That being said, I was losing WAY to much sleep over my outstanding debt, and the only way I could nip it in the bud, was to take out the loan and as of this morning be at a 1% UTIL across all cards.

I'm in the process of closing cards and working my way down to two cash back cards only.  One for gas, the other for Subway (seriously)

I set the loan payback to 60 months (as I did with the previous 2) so my bi-weekly payments were/are near nothing, and (as I did with the other two) intend to pay this one off within 12 months - all while paying myself 4.15% interest.

Again, I'm not saying what I did was right - in fact, I know it wasn't the best choice. 

I'm just saying that I am now resting better.

I'm also decades away from retiring, which makes it a LITTLE easier to chew on.

[codimom]

I would try to avoid borrowing from your 401k .  And while I agree with the poster who gave the long response, my reasons are a little different.  Yes, there is the lose the job,  pay the tax penalty.  Yes there is the lose the interest penalty.  But double check your plan... do they really allow you to continue to make contributions while you have an outstanding loan?  (mine does not)  Is there a matching contribution you'll be missing out on (can't go wrong with that sort of free money)?  Also, how is your emergency fund?  do you have one?  if not, does your 401k plan allow for multiple loans?  In my opinion, I would leave that 401k where it is and map out an aggressive plan of attack to just pay these guys down... I mean you can get rid of Lowes immediately... I know, i'm a big fan of snowball payments on credit cards... and if you can cut your budget and throw extra money at these, you'll have them gone quickly.

Oh and another "don't do it" reason... do you have the willpower to not run up all the cards again after you've zeroed them out? Many of us don't ... it took me a while to get that discipline myself.  Its just too tempting.

[FutureBillionaire]

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@enharu wrote:
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.

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Good advice.

I should also state that you have to look at the opportunity cost.  If you're paying exorbitant interest rates on your cards, the earnings that you are making on your retirement fund may be worth losing for a brief period.  I've used loans and withdrawals before.  I don't trust that the funds will be there when I retire, so I make use of them now if I have to.  Look at the interest you are paying and look at the return on your 401k.  Then, do what's best for you after doing the math.

[IWOL]

Thank you all for the replys, some very good advice.

As far as my 401K goes, Im not worried about losing my job, its very stable so virtually no risk of having to pay the loan back immediatly because of job loss.

I am also able with my plan to continue my contributions and receive the company match of 6% while I have a loan out.

As I said in my original post I would be able to pay the loan back over 16 months and my current contribution and match would continue as is.

If I do take the loan I will atleast save the 10% interest that I would be paying on the Wells Visa over the 16 months, so that would more than likely offset a good portion of the possible return I will be missing out on the 13K loan over the 16 months. If I am able to get some better reward cards I can probably add another $1k to $2K over that 16 month period in cash back.

As far as running the cards back up, I dont really see that being a problem as the largest portion of the debt was for a new air unit which was ofcourse a one time purchase. The rest of the debt I can pay off entirely over the next 8 months, so maybe the best thing to do is just take enough to pay off the Wells Visa and then pay the others off over the next 8 months, taking out the ones with the earliset promo preiod expiring dates first.

Anyhow, Im going to think it over a little more and make a decision next week. Thanks again for all the great input.

[austinguy907]

Rule #1 no loans from 401k -- this is because it's protected from CH7/13 from being attached or putting a lien on it, besides you'll end up paying about the same interest rate on the loan as you would the CC @ 9.9%

Rule #2 - just take the time to pay it off without adding more to it

Rule #3 - just breathe and everything will be okay

btw I had to do the AC thing this summer too and managed to get a quote for $4400 compressor / blower installed... with that and some holiday shopping I was in the same boat around 11K total.