That will save you thousands in interest, just make sure you pay as much as you are paying now, not the minimum payment. Can I ask how much you make a year? I would pay the minimum on the cc with the 2500 balance and throw all your extra money at the 7500 cc until it is paid off. Though you can open an IRA to save for retirement regardless of your employment situation, you only have access to a 401(k) through your job. I have 2 credit cards. [On-screen text] Should I use my 401k to pay off credit card debt? --Your loan will not be reported to credit bureaus, so there’s no effect on your credit score. Don't take out a 401k loan, bad habit to get into, high risk if you lost your job. A big factor will be how secure you feel in your job. As such, I would highly suggest you pay those off as fast as you can. Therefore, you aren’t reducing the overall debt … Also, I believe a 401K loan is better for your credit as it does not show on your credit report as a loan or outstanding credit due. Life choices: Debt vs. 401(k) While working towards becoming debt-free, use every trick in the book to save money, increase income, and pay down debt faster. We have identified the overspending and plan to curb our current spending habits a great deal in the coming months (and on into the coming years). Let's assume an individual has a credit card balance of $10,000 at … If you doubt, the loan will count ass a withdrawal and you will be taxed and revive a penalty, When You repay your loan, you are using money that has already been taxed. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. Do not spend money you don't have just to get cash back. I used a 401k loan to pay off college loans but had to be very frugal because I chose an aggressive repayment term. Don't use your 401(k) to pay off credit card debt, says 'credit junkie' with an 800+ score who tried it once ' I'm still on the journey': How this entrepreneur is bouncing back from 5-figure debt With the average credit card interest rate at 19.02%, the cost of having outstanding debt on your credit card is astronomical. And aggressively pay them down and to a zero balance. By using our Services or clicking I agree, you agree to our use of cookies. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. Each plan is different, but mine let me continue to contribute while I was repaying. Steve Rhode, The Get Out of Debt Guy: Is it a bad idea to use a 401k or IRA hardship withdrawal to pay off credit card debt? Please contact the moderators of this subreddit if you have any questions or concerns. If you don't check your spending habits, using your 401k won't do much for you. Usually there's a one time 4% transfer fee. But I would advise against it if you think you might want to leave or if there's any danger of losing your job or during the term of the loan. But you really need to make sure you target the overspending issue, which isnt just a creditncard issue. While I currently have no plans to leave my current position, I definitely don't want the loan to be a reason for me to stay if an opportunity presents itself in the next year to 18 months. That means if you lose your job or change employers, you migh… Methods to Pay Off Your 401k Loan Faster Make Bi-Weekly Payments. I can take out a 401K Loan and pay them down, and have that paid back in 18months.Or making the same payments to the Credit Card companies it would take 3 years, taking interest into consideration. Press J to jump to the feed. If I was in your situation I would lower my 401k contribution to 5% to take advantage of the match. The high risks of using a 401(k) loan to pay off other debt. Press question mark to learn the rest of the keyboard shortcuts. 2 the gains of not paying high-teens credit card interest is likely much better than the lost market returns, 3 agree, but still may make sense when considering the insane credit card interest. My company matches 5% but I set up an annual increase, which was more than offest by my raises to make up for starting a 401k late. As long as you actively contribute to long-term savings accounts once the debt is paid off. Press J to jump to the feed. “They should do both, even if it’s only putting the minimum amount in their 401k,” he said. There are two issues with tapping your retirement fund to pay off debt. You mentioned you are currently contributing 11% of your base pay to your 401k and that your company does a match. The danger of raiding your retirement savings. The numbers … With the Solo 401 (k) having $50,000 in it, they take out $25,000 from the account and use that $25,000 to pay off the credit card debt in one shot. Taking a 401k loan for this purpose is fairly smart. You mentioned you have $7500 due on one card and $2500 on another. 1 is about $7500 with a high interest of 20+ apr. Personally, I have done this before, and it worked for us. Avoid increasing the debit. That may not be wise but we can dive into that another time. What would be the best strategy for quick payoff, but long term financial success also. Press question mark to learn the rest of the keyboard shortcuts. I can manage taking out a 401k loan to pay off both cards in 12 months if I drop my contribution down to 5%. Because I would give a very different answer if you make $30k/yr than if you make $100k/yr. Don’t use your 401 (k) to pay off credit card debt, says ‘credit junkie’ with an 800+ score who tried it once The new coronavirus stimulus package will allow Americans to withdraw from their … Cookies help us deliver our Services. I say you have to weigh and make the best financial decision for you. Another option that would leave your retirement intact is looking for 0% balance transfer cards, but as mentioned, you'd have to change your spending habits and be sure you're not running up all the other balances (cut up all your existing cards and new ones as soon as you get them). Before borrowing from your 401 (k), crunch some numbers to determine how long it will take you to pay off your debt at the rate you're going and how much interest you'll have paid during that … The numbers look like this to pay off your balance at your credit card rate you will pay 209.35 per month for 60 months for a total of 12,561.00 which is 3761 in interest and 8800 in principal. Attempting to use credit cards for expenses to gain the "Cash Back" benefit, our family has managed to run our Credit Card balances up, and would like to get them paid off and then cancelled. You will miss out if your employer does a match. However, most plans require payment back very quickly if you leave your current job, or it could convert to a withdrawal, which really hits you on your taxes. If you end up leaving for whatever reason, you'll have to pay the balance of the 401k in full. By taking … Most 401 plans also do not allow you to contribute until you repay the loan. This heads off missed payment fees and protects your credit score. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. People use personal loans for so many different reasons—from buying an RV to paying off medical bills—but consolidating your credit card debt may be one of the most popular uses. As mentioned above, the loan becomes due, or you'll owe interest. Thanks guys! However, I'm not clear on one thing. This definitely is helpful! Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. I'm 31 years old with about 60k in my 401k. Thanks in advance for any suggestions or advice. But nothing is worse (ok, there are a few things, but you get my point) than paying credit card … If your employer provides a 401(k) retirement savings plan, it may choose to … Another option available is to cut back on contributing to your retirement plan in order to free up a little money to aggressively pay off high-interest rate credit card debt. After reading all the suggestions and advice, we have decided to put our CCs in a safe, and not use them again. You pay the 401(k) loan interest to yourself, not someone else. Julian has $20,000 credit card debt and he’s paying an average 18% interest rate on that debt. You can borrow up to half your 401 (k) balance, but no more than $50,000. Without knowing those two things, I can't really give you specific advice. If you have decent credit, see if you can't get a card with a 0% BT offer for 18 months. There are several credit cards out there that have balance transfer offers of 0% for 12-18 months and 0% fee (that second part is rare). Join our community, read the PF Wiki, and get on top of your finances! So they shouldn’t pay off credit card debt at the expense of saving for retirement. Join our community, read the PF Wiki, and get on top of your finances! Taking money out of your 401k … The withdrawal taxes and penalty are more expensive than the credit card interest … It’s not ideal, especially if you get an employer match, but it likely is better than choosing to cash out your 401(k) or taking a loan. This would pay off both of these cards with balances of $7,600 and $13,600. My life has improved greatly due to this sub. I have great job security and have no desire to leave. Any advice would be greatly appreciated. Not a solution but could help for a year. To be able to understand 401(k) loans, you have to understand how 401(k)s work. Continue Reading Below OP, have you looked into 0%APR introductory credit cards w balance transfer? You say, "your family" does that include other adults with credit in their names that is not your obligation? I'm currently putting in 11% into my 401k. I am a bot, and this action was performed automatically. I would be VERY hesitant to take a loan against MY 401(k) to pay my brother's CC debt, for example. Do you have any other substantial debt? Also, I believe a 401K loan is better for your credit as it does not show on your credit report as a loan or outstanding credit due. I would caution that if you do decide to go down this road, you and your family need to change your habits, or you will be paying down a 401K loan and credit card payments. If you can get a card with a $5000 limit, transfer $4500 to that card, and pay as much as you can to knock that balance down as possible while paying the minimum on the other card. By using our Services or clicking I agree, you agree to our use of cookies. 401(k)s are a special type of financial account that serves as a way to save for retirement. The next step would be to pay down the 401(k) loan. I don't have a car payment. This sounds too good to be true, right? When you pay biweekly, this means you pay … If you’re burdened with hefty credit card balances, school loans or other debt, however, you may be tempted to cut back on your 401(k) contributions to pay off the debt first. Many people say that you should never take a loan against your 401K. You could apply for one or two of those, do the balance transfer to take care of the current cards, and work on paying off the new cards over the 12-18 months. Cookies help us deliver our Services. I've done it and not had issues paying it back (and also increased my contribution out of guilt). That's a losing proposition. Reasons why advise against taking a loan … You will also be taxed when you take out your money for retirement, so your essentially being double taxed in the money that you borrow. I’d like to do this to pay off some high-interest credit card debt at 19.99 percent and 24.99 percent, respectively. Car loan, mortgage, medical expenses, etc... or are the credit cards it? For example, if you took a 401k loan to pay off credit card debt, stop going over the limit. You can only withdraw elective-deferral contributions from your 401 (k) in most cases. 1 often true but not always. Cut your spending and possibly your 401k contributions to get more cashflow to get rid of that debt as quickly as possible. Many 401 (k) plans allow users to borrow against their retirement savings. Options include American Express EveryDay, Chase Slate, and one from Bank of America which I can’t recall the name of. Lather, rinse, repeat until you are debt … I agree with this. I would advise against take a loan from your 401k. What is a 401(k) loan? I would ask for a reduced interest rate or open a new lower interest rate card and transfer the balance, then work to pay them off. What I can say, however, is that the 10% and 20% interest on your debt is likely to beat out what you would make this year in the stock market. The big risk you run with this strategy is the possibility of losing your job and having to pay the entire 401(k) loan … I make 90k a year and virtually have no money saved otherwise (around $4000). Please contact the moderators of this subreddit if you have any questions or concerns. So, a couple things and then I'll give you my opinion. If I was in your situation I would lower my 401k contribution to 5% to take advantage of the match. Hi! SHOULD YOU LOWER 401 (K) CONTRIBUTIONS TO PAY OFF DEBT? I mostly accumulated this debt in my early 20s when my rent was almost half of my take-home pay. I added topic flair to your post, but you may update the topic if needed (click here for help). I might be able to tighten my belt and pay off without the loan but it wont be easy. But then it's 0% for 12 or 14 months or so. Your 401(k) loan interest rate is likely lower than the rate on your other debt. So you've got $10k in credit card debt at the moment. I have about 30k in credit card debit with $450 a month in interest. 401(k)s are offered by employers as a benefit for their employees. I would pay the minimum on the cc with the 2500 balance and throw all your extra money at the 7500 cc until it is paid off, Reasons why advise against taking a loan from your 401k-, If you lose or leave your job, you have 60 days to repay your loan. Biweekly is the typical pay schedule. Thank you r/personalfinance for all the threads. Otherwise, you’re going to use up precious resources and increase your obligations. However, most plans require payment back very quickly if you leave your current job, or it could convert to a withdrawal, which really hits you on your taxes. So, even if he invests and receives a return of 7% on average for his investment dollars, he’s losing 11% (18-7=11) on the money he’s choosing to divert towards investing in lieu of paying off the debt. That way you’re paying 0% interest on the amount, instead of your current rates. I would not borrow from or withdraw from the 401k that tax benefit and the penalties will make a very expensive choice in the end. With Steve Rhode, The Get Out of Debt Guy. It was well worth it. Should look at 401k plan documentation or ask HR if loan needs to be repaid within 60 days or if they set up a payment plan. I pay $1500 a month in rent. If it were me, I would look at cutting your 401k contribution to nothing and instead dump as much money into paying off the credit cards as you can. A word of caution: If you leave your job before … The other is around 2500 and under 10 apr. I am a bot, and this action was performed automatically. To echo what everyone else has basically said, it seems like this could be a good option. My debt is manageable but I can do better. But nothing is worse (ok, there are a few things, but you get my point) than paying credit card interest..... Credit cards can be a valuable tool and offer rewards, if they are used responsibility. We got out of debt, and I paid myself back. Agree w other post’s suggestion to drop the 401k savings rate to get the max match, use the rest to hammer away at this debt. That said, the math works better for using a 401k loan vs credit card interest. Since we've seen that this strategy doesn't work for us. 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