FICO - CC strategy

[Anonymous]

We are thinking about taking a 401K loan to pay off our high CC debt. We've considered lots of options. We understand that we will be "losing" some money gained, but we are also in a cash flow pickle and need some relief. Relief we could get easily get by lowering our CC debt/interest rates.

#1: Our Goal is Pay off CC bills. (debt snowball is not working) #2: Our Solution is to Improve our FICO score so we have more opportunity for lower interest and opportunity to pay off the rest of our cards. 

1. Improve our FICO score.Do this by taking our 401K loan. We save appox $300 a month by doing this but also, substantially more when our credit improves and it should. We have no bad marks on our credit.

      a) It may be important to note that we have NEVER been late on anything and have a long credit history. Our FICO is purely low because we do not have enough "credit" - and we've tapped out our credit on some bad decisions made years ago - it's draggin us down.  We both have strong incomes, but high credit card bills. 

2.  CC bills

     b)  We understand it is 90% behavior. But we are commited to cutting them up after payment.

3.  Future

    c)  We plan to take 5 years to pay the 401K loan off. During that time, the CC payments should greatly increase our FICO and offer us more opportunity to take 0% CCs or refi on our home to get the rest paid off.

4.  We are commited, but because of cash flow really are having a hard time doing the debt snowball. We've tried. It's not working and we need another solution.

Please provide any feedback considerations etc. We are all ears.

Thanks!

[SouthJamaica]

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@Anonymous wrote:

We are thinking about taking a 401K loan to pay off our high CC debt. We've considered lots of options. We understand that we will be "losing" some money gained, but we are also in a cash flow pickle and need some relief. Relief we could get easily get by lowering our CC debt/interest rates.

#1: Our Goal is Pay off CC bills. (debt snowball is not working) #2: Our Solution is to Improve our FICO score so we have more opportunity for lower interest and opportunity to pay off the rest of our cards. 

1. Improve our FICO score.Do this by taking our 401K loan. We save appox $300 a month by doing this but also, substantially more when our credit improves and it should. We have no bad marks on our credit.

      a) It may be important to note that we have NEVER been late on anything and have a long credit history. Our FICO is purely low because we do not have enough "credit" - and we've tapped out our credit on some bad decisions made years ago - it's draggin us down.  We both have strong incomes, but high credit card bills. 

2.  CC bills

     b)  We understand it is 90% behavior. But we are commited to cutting them up after payment.

3.  Future

    c)  We plan to take 5 years to pay the 401K loan off. During that time, the CC payments should greatly increase our FICO and offer us more opportunity to take 0% CCs or refi on our home to get the rest paid off.

4.  We are commited, but because of cash flow really are having a hard time doing the debt snowball. We've tried. It's not working and we need another solution.

Please provide any feedback considerations etc. We are all ears.

Thanks!

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Sounds like a good idea to me. And if cash flow picks up you can always accelerate your repayment of the 401k loan.

[Anonymous]

I’ve never taken out a 401k loan (don’t have one lol). Is the interest rate much lower than taking out like an unsecured loan from someone like PenFed?

[Anonymous]

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@Anonymous wrote:
I’ve never taken out a 401k loan (don’t have one lol). Is the interest rate much lower than taking out like an unsecured loan from someone like PenFed?

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The difference is the interest is paid to yourself (The interest is basically a dividend into your 401k).  The downside is the money you took out of your 401k is no longer invested in the Market and you will lose out on any gains you would have made.  Additionally, the loan can only be paid back via payroll in most cases (maybe 100%?)

[Anonymous]

Paying interest to yourself sounds like a pretty good deal to me. I don’t think you could do better for a debt consolidation loan.

[Anonymous]

Yeah - the loan would be at around 6% but we would be paying ourselves back.

Per our plan - it would come out as an automatic deduction, weekly, and we have a maximum of 60 months to pay it back.

We do loose out on the investment money, which is hard to see go, but at the same time, we could quickly make that up with our income if we were not paying out all this money in CC bills - lol

How long does it take your FICO to recover (move up) after you start paying down your CC. If we were to decrease our credit by 50-60% how many months are we looking at before our FICO moves up?

Thanks in advance!

[Anonymous]

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@Anonymous wrote:

2.  CC bills

     b)  We understand it is 90% behavior. But we are commited to cutting [the credit cards] up after payment.

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It all sounds really smart to me.

I'd make two tweaks to your approach (related to the text in blue above).

(a)  Cut them up now, rather than later.  That will force all future purchases to be made with debit cards, i.e. with money you have in the bank now.

(b)  When you do pay them all to zero (which sounds like might not happen for several months) still keep them open.  Set up recurring transactions of stuff that you know you'd have to buy/pay anyway (e.g. cell phone bill, Netflix, etc.) and with the rest resolve to make a small transaction (could be online) once every six months to keep them open.  A popular choice is a $3.01 deposit to one's Amazon account, with the resolution that when the Amazon balance gets high enough you still only use it for something you really need.

[Anonymous]

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@Anonymous wrote:

How long does it take your FICO to recover (move up) after you start paying down your CC. If we were to decrease our credit by 50-60% how many months are we looking at before our FICO moves up?

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The scoring benefit happens instantly, once the new CC balances have reported to the bureaus and the bureaus have updated their databases.

In practice, that means that if you paid all cards to 25% today (say) you'd begin to see benefit as soon as a couple cards reported the new balances (e.g. in 15 days) with the full benefit being realized in no later than 45 days.

[marty56]

If you are having a cash flow problems, then using 0% CC won't help you since the monthly payments will be higher and presents risk down the road if you don't PIF by the end of the term date.  What you might consider doing is entering a DMP program which will reduce your interest to 0% in most cases but the longest you can be in the program is 5 years so you need to be able to afford to make the payments.  Your 401k loan may help there so you have lower interest rates and able to make make the payments.