General Question

luminous00's avatar

I have credit card debt, and a 401k account from my last job that equals that debt, what are my options here?

Asked by luminous00 (347points) July 23rd, 2008

I know the repercussions already if I were to drain the 401k to pay this debt, but right now it seems like the only logical thing to do in order to get to a clean slate so I can start saving for a house. If I had a clean credit card, I’d be able to pay it off every month and then have money saved quickly. My 401k is at 7k, I’d lose 2k from taking it out instead of transferring, and that would pay the cc off in full. I don’t see taking a loan out as an option only bc I’m already paying for 3 loans as it is. Any help would be greatly appreciated.

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16 Answers

tiklpikl's avatar

Are you sure about the $2k? I believe you lose more than that because you are looking at taxes + penalties for early withdrawal. I would try to negotiate with the credit cards to get a lower interest rate. Also, if you have any room, try to do a balance transfer (watch out for the transfer fee).

kevbo's avatar

Would you pay more than $2,000 (or whatever the cost is to drain your 401(k)) in interest over the period of paying off your credit card? If you paid your credit card off, are you sure that you wouldn’t go back to building up a credit card balance with your normal expenses? Is it possible to defer one of your loans or to negotiate interest only payments on one of your loans in order to free up some cash to pay off your credit card?

luminous00's avatar

The 2k is the 30% that’s taken off the 7k (that’s including the IRS fees and then the fees the company takes out), and unless an emergency comes up that card wouldn’t get higher than what it would take to pay it off each month. Wouldn’t loan deferment carry interest as well? Right now i’m only paying two loans, my truck loan and my school loans, the third isn’t going to hit me until march of ‘09

jballou's avatar

Taking money out of your 401K is never a good idea, because even though you’ve calculated the penalties for early withdrawal, you haven’t calculated the lost potential income that would get by having the money stay where it is and compound upon itself. So you’re losing 2,000 of the money upfront, but in a year from now that 401K would be yielding a return that you now won’t receive- and in turn that return would have raised the value of the 401K.

When paying off debt, it’s always important to compare the different interest rates. If I were you and could qualify for a new card, I would find one with a good introductory rate, transfer the balance to the new card, make monthly deposits to a savings account with a higher interest rate then the new card equal to the monthly payments I would have normally been making to the credit card balance. Once the savings account has enough to pay off the entire balance, do so. It’s a quick and efficient way to pay off your balances without losing money to interest rates.

allengreen's avatar

I suggest Debt Settlement/Debt Negoications. You will trade your credit score on a tempory basis, and you will repay only 40% of the credit card debt. At the end of the 24 month program you will have recovered credit score, no debt, and will retain the 401k.

Taking out a loan when in debt is shoveling while it is snowing. There are a couple of reputible companies that do Negoications, I suggest an attorney based program for several reasons.

I have been in the finance industry all my life, and would recomend this option if you are having trouble paying all the bills. If you are a wash in cash, pay them off strait. If not, let me know if you need direction on this.

By the way, most Americans are woefully under-educated on these matters, be careful who you take advise from. Most folks get their financial education from advertising that is paid for by the Banks, or they get their information from broke folks who themselves can’t manage money.

By the way DO NOT DO CONSUMER CREDIT COUNCELING—DO DEBT SETTLEMENT—THEY ARE VERY DIFFERENT.

jballou's avatar

I would STRONGLY advise against debt settlement! It doesn’t sound like you’re in financial peril and debt settlement will do some things you probably don’t need to do.

Number 1— debt settlement will close the account and will not allow for that account to be re-opened ever again. It will also make it very hard for you to acquire credit with that company again, as they keep records indefinitely and use that type of information for credit decisions.

Number 2— debt settlement will be reflected on your credit report, as “Settled” which can be a negative. (It might also appear as “Paid as Agreed” which is not negative)

Number 3 – debt settlement will sometimes require that you pay taxes on the settlement difference. For example, if the debt is 2,000 and you agree to pay 1,500 to settle the debt, that 500 difference can be considered income!

Debt settlement should be a last resort if you find you absolutely cannot pay your bills as it is better then having repeated late payments, but if you can handle your bills, don’t settle your debt because the best possible thing you can do for your credit (since you are looking into buying a house) is to have long standing open accounts in good standing on your credit report.

If you can afford to pay your whole balance- DO IT.

luminous00's avatar

I’ve also looked into selling my absurdly expensive truck that I bought 3yrs ago that’s costing me over 1000 a month just in payments and gas, and that’s without the 100 dollar oil changes every couple months! My payoff is 21k, and the actual worth of the truck is now 10k, which I’m only assuming is due to the decrease in demand for gas-guzzlers. It’s a 2005 Dodge Ram Daytona package….ugh, I’m screwed.

jballou's avatar

If your credit has gotten better since you bought that truck (which it most likely has if you’ve never been late or missed a payment), try refinancing your loan. You might be able to get a better interest rate then you got when you first got the loan.

Also- learn to change your own oil dude!! It’s absurdly easy. You can find instructions online.

Also- revisit your car insurance, see if you can get a better rate. If you haven’t had any accidents in the past few years you might be able to get a good driver discount. All these things added up can save you quite a bit of dough, which you can stick in a high-yield savings account and use to pay off that credit card bill.

Response moderated
luminous00's avatar

@ jballou – My credit is almost perfect bc I never miss a payment.

jballou's avatar

@luminous00 – If your credit is good, I would definitely seek out some lower interest rates on your loans and credit cards. You can sometimes save a couple hundred bucks or more, just by transferring your balance from one card to another.

@allengreen How am I uninformed at all? I just went through extensive financial restructuring and I’m speaking from personal experience. My advice is there for him to take or ignore, but everything I said came from a true experience that I’ve personally gone through. Every single thing I listed that could go wrong with debt settlement happened to me. So again, I ask, in what way is what I said misinformed? I would love to hear your take on everything.

Cutting and pasting my entire answer and saying it’s all wrong doesn’t really help anybody.

allengreen's avatar

“So again, I ask, in what way is what I said misinformed? I would love to hear your take on everything.”

Had you used an attorney based program for settlement, 1. all accounts would have showed paid when you finished, 2. the same creditors will line up to extend credit to you again, 3. folks that have financial hardship (not gaming the system) will never pay taxes on the forgiven debt, and 4. I agree if one has the cash to pay it, that is the best thing to do, but if one did, they would not post the question or be pondering raiding retirement to pay off UNSECURED DEBT.

If someone who’s credit cards are maxed thinks they have “almost perfect credit”, they are mistaken, because any time a revolving account gets above 50% of the limit, you are loosing 10% of your credit score on a monthly basis….even if you never miss a bill, you will eventually be under 500 fico as a result of high balance compared to the limit.

The problem with the mortgage and credit crisis is that folks GET THEIR INFO FROM MARKETING AND ADVERTISING WHICH SERVES THE PURPOSE OF KEEPING YOU ENSLAVED IN DEBT, like the majority of Americans. This lack of understanding has been demonstrated here today in detail….

Please do not kill the messanger. We are entitled to our opinions, but not our own facts.

Better yet, transfer the balances around, and lower your scores further and rent forever—better yet, use your 401k to PAY UNSECURED DEBT, like a good debt slave. Then go vote for McCain, enlist in the Army and be fodder for the next 100yr war.

Tranfer balances—cut your nose to spite your face—I’m trying to help, but the unhelpable cannot be helped. Keep living large, charge it, pay mins…YEAH! RAH RAH.

ONE MORE THING EINSTEIN, REAL ESTATE NEVER GOES DOWN.

robmandu's avatar

@allengreen, thought your last reply was cogent and well-written… until you fell off the rails with the rant on the last three paragraphs. Totally whacked your credibility.

jballou's avatar

@allengreen Wow dude. You know when you said you were in the financial field, I was hoping you’d have something to add to the overall conversation. Obviously you’re deeply offended by something that I or someone else said, but try to keep in mind that the purpose of this site is to help the person asking the question. Some of the stuff you said was probably valid, but do you really think anybody is going to be able to digest any of the advice you’ve given considering your post is full of sarcastic comments and pot shots at others?

richardhenry's avatar

[Fluther Moderator:] Please do not copy paste an entire answer just to append the word ‘wrong’.

allengreen's avatar

you are right, I was arrogant and out of line.

I guess I went over the edge when the web designer started disputing my points.

Kind of like if I telling Michael Jordan how to hit a jump shot.

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