Pay off card debt with 401(k)? Ita s new a I wanta error | The Columbus Dispatch
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#1 Jun 26, 2011
While this logic applied in the past, when credit card rates and fees were reasonable in some situations is does make sense to use a much lower cost loan from your 401k to pay off a high interest credit card loan. However there are some catches:
1. You should never take more than 1/4 of your total 401k balance.
2. Your 401k should allow you to repay your loan to yourself and apply the interest earned on the loan back to the 401k balance. Some do and some do not.
3. The difference in the interest rate between the credit card and the 401k loan interest should be significant. Example: A 29% rate on a 10k credit card balance vs. a 5.5% interest rate on the 401k.
4. Job stability. If you lose your job some 401k's require immediate payback of the entire amount owed, immediately.
5. You destroy the credit card and close the account. Frankly very few people need a credit card with a 10k limit if they are living within their means. Reduce your limit to no more than 5k and carry only 1 card. Pay cash for everything. If you can't afford it, don't buy it.
6. Set the payoff term on the 401k loan to the shortest time you feel you can afford and not put you in a cash poor situation.
In some situations it DOES make sense to not pay huge interest rates and fees. Talk with a qualified financial adviser before you make any decisions. Don't just rely on newspapers or web blogs for this advice. Everyone's situation is different.
#2 Mar 26, 2014
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