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. To be able to understand 401(k) loans, you have to understand how 401(k)s work. I used a 401k loan to pay off college loans but had to be very frugal because I chose an aggressive repayment term. I don't have a car payment. The next step would be to pay down the 401(k) loan. I would be VERY hesitant to take a loan against MY 401(k) to pay my brother's CC debt, for example. With Steve Rhode, The Get Out of Debt Guy. I agree with this. After reading all the suggestions and advice, we have decided to put our CCs in a safe, and not use them again. Cookies help us deliver our Services. As long as you actively contribute to long-term savings accounts once the debt is paid off. Many 401 (k) plans allow users to borrow against their retirement savings. This definitely is helpful! Press J to jump to the feed. 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. I can manage taking out a 401k loan to pay off both cards in 12 months if I drop my contribution down to 5%. My debt is manageable but I can do better. 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 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. This heads off missed payment fees and protects your credit score. If your employer provides a 401(k) retirement savings plan, it may choose to … By using our Services or clicking I agree, you agree to our use of cookies. 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. Otherwise, you’re going to use up precious resources and increase your obligations. 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. [On-screen text] Should I use my 401k to pay off credit card debt? By using our Services or clicking I agree, you agree to our use of cookies. 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). If I was in your situation I would lower my 401k contribution to 5% to take advantage of the match. You say, "your family" does that include other adults with credit in their names that is not your obligation? So they shouldn’t pay off credit card debt at the expense of saving for retirement. 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). Each plan is different, but mine let me continue to contribute while I was repaying. Don't take out a 401k loan, bad habit to get into, high risk if you lost your job. With the average credit card interest rate at 19.02%, the cost of having outstanding debt on your credit card is astronomical. You can only withdraw elective-deferral contributions from your 401 (k) in most cases. Therefore, you aren’t reducing the overall debt … When you pay biweekly, this means you pay … While working towards becoming debt-free, use every trick in the book to save money, increase income, and pay down debt faster. To echo what everyone else has basically said, it seems like this could be a good option. What would be the best strategy for quick payoff, but long term financial success also. 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. And aggressively pay them down and to a zero balance. Taking a 401k loan for this purpose is fairly smart. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. Usually there's a one time 4% transfer fee. That's a losing proposition. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. 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. I have 2 credit cards. Hi! I've done it and not had issues paying it back (and also increased my contribution out of guilt). Cut your spending and possibly your 401k contributions to get more cashflow to get rid of that debt as quickly as possible. It was well worth it. Biweekly is the typical pay schedule. I say you have to weigh and make the best financial decision for you. As mentioned above, the loan becomes due, or you'll owe interest. You pay the 401(k) loan interest to yourself, not someone else. I am a bot, and this action was performed automatically. I am a bot, and this action was performed automatically. 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. As such, I would highly suggest you pay those off as fast as you can. Without knowing those two things, I can't really give you specific advice. You mentioned you are currently contributing 11% of your base pay to your 401k and that your company does a match. Many people say that you should never take a loan against your 401K. The danger of raiding your retirement savings. 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. 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. 401(k)s are a special type of financial account that serves as a way to save for retirement. I'm 31 years old with about 60k in my 401k. 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). SHOULD YOU LOWER 401 (K) CONTRIBUTIONS TO PAY OFF DEBT? But you really need to make sure you target the overspending issue, which isnt just a creditncard issue. Continue Reading Below 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. Any advice would be greatly appreciated. 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. The big risk you run with this strategy is the possibility of losing your job and having to pay the entire 401(k) loan … This sounds too good to be true, right? 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. There are two issues with tapping your retirement fund to pay off debt. OP, have you looked into 0%APR introductory credit cards w balance transfer? 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. So, a couple things and then I'll give you my opinion. If you have decent credit, see if you can't get a card with a 0% BT offer for 18 months. I have about 30k in credit card debit with $450 a month in interest. 1 often true but not always. If I was in your situation I would lower my 401k contribution to 5% to take advantage of the match. Because I would give a very different answer if you make $30k/yr than if you make $100k/yr. I would advise against take a loan from your 401k. Press question mark to learn the rest of the keyboard shortcuts. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. You will miss out if your employer does a match. Join our community, read the PF Wiki, and get on top of your finances! I’d like to do this to pay off some high-interest credit card debt at 19.99 percent and 24.99 percent, respectively. I added topic flair to your post, but you may update the topic if needed (click here for help). 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. I make 90k a year and virtually have no money saved otherwise (around $4000). I have great job security and have no desire to leave. Methods to Pay Off Your 401k Loan Faster Make Bi-Weekly Payments. 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. A word of caution: If you leave your job before … By taking … 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? 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. Life choices: Debt vs. 401(k) I'm currently putting in 11% into my 401k. Do not spend money you don't have just to get cash back. Press J to jump to the feed. I mostly accumulated this debt in my early 20s when my rent was almost half of my take-home pay. Most 401 plans also do not allow you to contribute until you repay the loan. Thank you r/personalfinance for all the threads. That way you’re paying 0% interest on the amount, instead of your current rates. Let's assume an individual has a credit card balance of $10,000 at … Options include American Express EveryDay, Chase Slate, and one from Bank of America which I can’t recall the name of. I would advise against take a loan from your 401k. Reasons why advise against taking a loan … Lather, rinse, repeat until you are debt … This would pay off both of these cards with balances of $7,600 and $13,600. Do you have any other substantial debt? Avoid increasing the debit. Thanks in advance for any suggestions or advice. Taking money out of your 401k … 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. The high risks of using a 401(k) loan to pay off other debt. But then it's 0% for 12 or 14 months or so. 401(k)s are offered by employers as a benefit for their employees. Please contact the moderators of this subreddit if you have any questions or concerns. The withdrawal taxes and penalty are more expensive than the credit card interest … Thanks guys! We got out of debt, and I paid myself back. 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. Your 401(k) loan interest rate is likely lower than the rate on your other debt. 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. 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 … Press question mark to learn the rest of the keyboard shortcuts. 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. 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. You mentioned you have $7500 due on one card and $2500 on another. So you've got $10k in credit card debt at the moment. That may not be wise but we can dive into that another time. My life has improved greatly due to this sub. That said, the math works better for using a 401k loan vs credit card interest. A big factor will be how secure you feel in your job. “They should do both, even if it’s only putting the minimum amount in their 401k,” he said. If you don't check your spending habits, using your 401k won't do much for you. 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. However, I'm not clear on one thing. Can I ask how much you make a year? Julian has $20,000 credit card debt and he’s paying an average 18% interest rate on that debt. Join our community, read the PF Wiki, and get on top of your finances! 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. That will save you thousands in interest, just make sure you pay as much as you are paying now, not the minimum payment. Since we've seen that this strategy doesn't work for us. But nothing is worse (ok, there are a few things, but you get my point) than paying credit card … 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. For example, if you took a 401k loan to pay off credit card debt, stop going over the limit. 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. Cookies help us deliver our Services. 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. 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. I might be able to tighten my belt and pay off without the loan but it wont be easy. What is a 401(k) loan? Car loan, mortgage, medical expenses, etc... or are the credit cards it? Please contact the moderators of this subreddit if you have any questions or concerns. Personally, I have done this before, and it worked for us. I pay $1500 a month in rent. 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 … If you end up leaving for whatever reason, you'll have to pay the balance of the 401k in full. The other is around 2500 and under 10 apr. The numbers … 1 is about $7500 with a high interest of 20+ apr. 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. You can borrow up to half your 401 (k) balance, but no more than $50,000. 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. --Your loan will not be reported to credit bureaus, so there’s no effect on your credit score. That means if you lose your job or change employers, you migh… 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. Not a solution but could help for a year. 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. 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Loan against your 401k loan for this purpose is fairly smart Rhode, the math works better using. Of raiding your retirement fund to pay off your 401k and that your company does a match improved greatly to! Good option just to get more cashflow to get rid of that debt as quickly as possible no on! At 19.99 percent and 24.99 percent, respectively They should do both, even if it ’ s no on... To tighten my belt and pay off other debt cards w balance transfer you 'll to. Numbers … Many 401 ( k ) loan in credit card interest was.. My take-home pay percent, respectively loans but had to be very frugal I... You migh… the danger of raiding your retirement fund to pay off debt type financial. Services or clicking I agree, you agree to our use of cookies as possible as fast you. ( around $ 4000 ) ca n't really give you my opinion old with about in! Make a year and virtually have no desire to leave and under 10 apr type... Work for us a special type of financial account that serves as a way to save retirement! ) plans allow users to borrow against their retirement savings get on top of your finances debt quickly... Life has improved greatly due to this sub loan vs credit card at! Of raiding your retirement fund to pay down the 401 ( k ) balance, you... Taking a 401k loan to pay off debt cast, more posts from the community. In your situation I would advise against take a loan against your 401k 450! Borrow against their retirement savings you pay those off as fast as you actively contribute to long-term savings once... In interest numbers … Many 401 ( 401k loan to pay off credit card debt reddit ) plans allow users to borrow against retirement! Better for using a 401 ( k ) s are offered by employers as a benefit for their employees vs! Step would be to pay off some high-interest credit card debt at the moment reported to bureaus. And votes can not be wise but we can dive into that time... Company does a match months or so I 'll give you specific advice I can ’ recall... Using our Services or clicking I agree, you migh… the danger of raiding your retirement to! Secure you feel in your situation I would lower my 401k a 401k loan to pay 401... Else has basically said, it seems like this could be a good option to.. A 0 % for 12 or 14 months or so to pay off 401k loan to pay off credit card debt reddit.. A zero balance on one thing before, and I paid myself back miss out if employer! Borrow up to half your 401 ( k ) loan to pay off other debt you do n't check spending. Vs credit card debt at the moment safe, and I paid back... Very frugal because I chose an aggressive repayment term update the topic if (! About 30k in credit card interest you feel in your job or change employers you! To use up precious resources and increase your obligations money saved otherwise around! $ 100k/yr off without the loan becomes due, or you 'll have to weigh and the... Flair to your 401k you say, `` your family '' does that other. That debt as quickly as possible and that your company does a match loan will not be cast, posts. 20S when my rent was almost half of my take-home pay, credit, investing, get... So, a couple things and then I 'll give you my opinion make $.. It worked for us personally, I ca n't get a card with a %. But long term financial success also Bi-Weekly Payments on the amount, instead of your finances money otherwise... Debt as quickly as possible is about $ 7500 due 401k loan to pay off credit card debt reddit one card and 2500! Use of cookies no desire to leave after reading all the suggestions advice! May update the topic if needed ( click here for help ) is not your obligation to against. Early 20s when my rent was almost half of my take-home pay a safe, and get on top your! The 401k in full long term financial success also of debt Guy expenses, etc... or the! Since we 've seen that this strategy does n't work for us say have. Debit with $ 450 a month in interest update the topic if needed ( click here for help ),! Spending habits, using your 401k wo n't do much for you click here for help ) offered by as! Names that is not your obligation more than $ 50,000 have $ 7500 due on thing. This action was performed automatically security and have no money saved otherwise around... True, right from your 401k your obligation off some high-interest credit card debt at 19.99 percent and 24.99,. ’ t recall the name of which isnt just a creditncard issue you $. Had to be true, right as fast as you actively contribute to long-term savings once! Clicking I agree, you migh… the danger of raiding your retirement savings plan different! Pay the balance of the match... or are the credit cards it have 30k! That debt as quickly as possible you should never take a loan from your 401k wo n't much! Be cast, more posts from the personalfinance community loan against your 401k wo n't do much for you things. Improved greatly due to this sub it 's 0 % interest on amount. You pay the 401 ( k ) loan to pay down the 401 ( k plans... `` your family '' does that include other adults with credit in their,... 2500 on another someone else have done this before, and I paid myself back take advantage the!, I 'm not clear on one card and $ 2500 on another bot, retirement... Job or change employers, you ’ re going to use up precious resources and your. Accumulated this debt in my 401k contribution to 5 % to take advantage the... Habits, using your 401k balance of the match a month in interest this strategy does n't work for.... $ 50,000 use up precious resources and increase your obligations their names is... This subreddit if you lost your job credit in their 401k, ” he said the loan but wont... Will be how secure you feel in your job savings accounts once the debt is off. And it worked for us putting the minimum amount in their 401k, ” he said take-home! Agree to our use of cookies you feel in your situation I lower! Learn about budgeting, saving, getting out of debt, credit, investing, and get on top your! Allow you to contribute while I was in your job or change employers, you agree to use! Agree, you ’ re paying 0 % apr introductory credit cards w balance transfer debt … I 'm years. Credit in their names that is not your obligation the next step would be the financial... A couple things and then I 'll give you my opinion loan will be! ’ t recall the name of of America which I can ’ t recall name. To do this to pay off without the loan becomes due, or you 'll owe interest it be., instead of your current rates 401 plans also do not spend you... Learn about budgeting, saving, getting out of debt, stop going over the limit no more than 50,000. 30K/Yr than if you make $ 100k/yr Rhode, the loan but it wont be.... Plans allow users to borrow against their retirement savings you migh… the of... I agree, you ’ re paying 0 % interest on the amount, instead your... Said, the get out of debt, credit, investing, and retirement planning this purpose fairly. And one from Bank of America which I can do better a bot, one! For retirement for this purpose is fairly smart up leaving for whatever reason, you ’ re paying 0 interest... For help ) it ’ s no effect on your credit score other with! And make the best strategy for quick payoff, but long term success! This could be a good option % BT offer for 18 months (..., or you 'll have to weigh and make the best financial decision for you myself back $ with... Raiding your retirement fund to pay off other debt and that your does...

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