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Hydee | 401K Loans and Credit Cards...Help!!? |
I have two huge credit cards that need to be paid off, as well as two small ones. I was thinking about taking out a loan from my 401K to pay the small ones off and some of the big ones. It won't pay them completely off. I am trying to figure out how the credit card companies calculate their minimum payments. I need to know this in order to figure out how much my monthly payments will be so that I can fit everything into my budget. It is hard because I can take alot out of my 401K but like I said it won't pay the big credit cards off all the way so I still have a balance that I have to worry about, as well as my 401K loan payment. It is just really difficult to make this all work right so I don't get in over my head. If anyone can give me some helpful advice I would appreciate it. |
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John the Actuary
|
Minimum Payments:
Each credit card has its own policy for determining the minimum payment. You will need to call yours and ask the Customer service rep how they do it.
401k loan:
Be aware that a 401k loan can be a high risk strategy, especially if you are unsure you will remain with your employer for the whole length of the payoff period.
If you know you are staying put though it can be smart: If your cards have a balance of $2,000 and they have an interest rate of 16% and the 401k loan is 9%, you are saving 7% of $2000 or $140 by refinancing your debt this way.
If you leave your employer, though, you will be throwing this advantage away and then some. Many plans require terminating employees to pay back any outstanding loans or treat them as a distributions. If this happens you will owe regular income tax plus a 10% excise tax on the outstanding balance of the loan. If the $2,000 is paid down to $1,500 in 6 months, you are in the 28% tax bracket and you quit, you will need to find $570 (38% of the $1,500) to pay the tax man.
Some folks will also tell you that the loan is a bad idea from an investment perspective as well. This isn't always the case. I've seen a couple plans where interest paid on an outstanding loan gets paid back into your account. If the loan is at 9%, you're paying yourself a 9% return (guaranteed by you). That's better than any guaranteed return you'd get in the plan.
In any case, forget about the "size" of each credit card balance. Instead, focus on the interest rates you are being charged. Pay the highest one first. This will reduce your debts the fastest.
AND CUT THE PLASTIC UP!!! Credit card debt is financial cancer; it reduces your options and puts you in uncomfortable situations like the one you are in.
Good luck |
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meandnadine
|
I would recommend NOT taking a loan from your 401k.
Take the one with the lowest interest rate and pay the minimum on it. The one with the higher rate, pay as much as you can on it until it's paid off. Then put that money as well as the minimum on the other one and pay it off.
It can be done. |
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Veritatum17
|
NOT UNLESS ABSOLUTELY NECESSARY.
The problem with borrowing against your 401(k) is what if you default on that loan? You don't want to consider the consequences. In your case, especially, were you to borrow against the 401(k) you'd be making even more loan payments than before - your credit cards, and then to service the debt against your 401(k), which would crimp your cash flow further.
For the time being, stop contributing to the 401(k) and focus on paying off your credit cards. Try to consolidate your loans if you can. A home equity loan is preferable to a credit card... even a personal loan from a credit union is at a better interest rate.
The minimum payments are calculated using some sort of wizardry that PhDs in math cannot divine. Generally it's a small percentage of the total balance outstanding, but if you have defaulted in the past then this amount will go up.
This is not an easy position to be in, but hang in there.
One last thing, in the worst case scenario, defaulting on your credit cards is terrible, but they cannot go after your retirement savings (unless you're over 55 and can draw on them for income). Still, you don't want to go there, so call a consolidator. |
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marxistharpist
|
Why don't you refinance your home and roll the debt into the equity of the home? |
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DebtFree
 |
I would not use 401k money... not a good idea.... especially if you have not changed the habits that got you into this mess in the first place... overspending, poor money managing skills, etc. |
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AriesJWR
|
You can make a quick phone call to the issuers on your credit cards and ASK them how their minimum monthly payment is determined... this will help you budget.
Also, hopefully you can at least pay ONE of the credit cards in full (so you only have 1 payment left over plus your loan) - make sure you're paying off the highest interest rate first! |
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brk
 |
I had three cards and a student loan to pay off. the advice is always the same. pay the higher interest one off first. as you pay each off you can apply that money that you used to pay fro those to the remaining. pretty soon you'll be down to one and pay that off.
If you want you can dig into your 401k loan. I personally would recommend that its better to do the above. But if you have to dig into your 401k then do so and pay the higher interest one off first. |
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Teri
|
Don't use the 401k to pay off your credit card. You will only be hurting yourself in the long run.
First of all stop using the credit cards and establish a budget.
If you can see if you can do a balance transfer to get lower rate.
Pay any extra to the highest credit card %. Bring your budget to the bare bones-stop eating lunch out every day, have a yard sale, get a second job. Do what you need to get in gear!! |
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richkvegas
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Whatever you decide to do you need to change your spending habits or you will be in more credit card debt later. Obviously you are not living on what you make so you will continue to have debt problems. |
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