Using 401k to pay off credit card debt

[JohnCPVT]

Hi all,

I am in the process of trying to improve and re-establish my credit....i have built up around 3500 in my 401k from my previous job, and i know it's probably dumb to take a lump sum vs rolling over to an IRA, but i was thinking maybe this would be an opportune time for me just to wipe out my debt all at once..my credit card debt hovers around 3500-4k right now. Any suggestions or advice would be great.


thanks again

JP

[Broken Arrow]

Welcome.

What are the interest rates on your debts?

What kind of interest rates would they charge if you were to leverage against your 401k?

How badly do you need to repair your credit right at this moment?

[JohnCPVT]

i believe the interest rate on my debt falls around 20-25%, maybe more...

i'm not sure how much interest they would charge me if i opted to receive my 401k in a lump sum to my bank account...all i know is that i would get hit with a 10% tax penalty come tax time...

i am aiming to buy a place within the 12-18 months so i would like to clear myself of as much debt asap, while at the same time to try and build a solid credit report..

thanks..

[disneysteve]

i know it's probably dumb to take a lump sum vs rolling over to an IRA

You are correct. Cashing out your 401K is a BAD idea. You pay income tax on the money, since it went in tax-free and you pay a 10% penalty for taking an early withdrawal. So that $3,500 would only net you about $2,200. It so isn't worth it. Roll it into an IRA and leave it there until you retire.

I don't know what you earn, but $3,500 in CC debt isn't anything terrible. Live below your means and get that paid off. You say you want to buy a home in a year or so. How much have you saved for the downpayment? Couldn't you use some of that savings to get rid of the CC debt? How about your emergency fund? How much is in that? What other savings and investments do you currently have?

[JohnCPVT]

I don't know what you earn, but $3,500 in CC debt isn't anything terrible. Live below your means and get that paid off. You say you want to buy a home in a year or so. How much have you saved for the downpayment? Couldn't you use some of that savings to get rid of the CC debt? How about your emergency fund? How much is in that? What other savings and investments do you currently have?

Thaks for the advice..yes, unfortunately, my savings aren't that much at all...but maybe i should just use my regular wages from work to pay off a bit each paycheck, and roll what i have over to an IRA...i just want to get rid of my credit card debt asap....

[Tree0164]

Don't touch the 401k to pay off your cc debt. Move it over to a rollover IRA.

As for the debt, do a budget and throw anything extra at it.

[disneysteve]

unfortunately, my savings aren't that much at all

I had a feeling you might say that. I think you need to get out of debt, build an emergency fund and save a substantial down payment before you go house hunting.

[JohnCPVT]

I had a feeling you might say that. I think you need to get out of debt, build an emergency fund and save a substantial down payment before you go house hunting.

Thanks for the advice..the house thing is a goal of mine, but yes, i want to take the steps to get there.....how much emergency funds should i save ? peopel say 6 months salary, but wow, that's a lot, isn't it?

[disneysteve]

how much emergency funds should i save ? peopel say 6 months salary, but wow, that's a lot, isn't it?

Not at all, though keep in mind that it isn't 6 months of income. It is 6 months of expenses which is somewhat lower.

Also remember that once you become a home owner, your expenses rise considerably. Higher utility bills, insurance, taxes, maintenance, etc. Suze Orman gives a rule of thumb that your monthly costs will be about 40% above your mortgage payment, so if the payment is $1,000/month, your real costs wlll be more like $1,400/month, so plan accordingly.

[JohnCPVT]

i see..thanks steve for the advice..wow, it looks like i may be in bad shape here..

[Pleasenodebt]

I agree with steve. Just keep working on it and become more efficient so that you can reach those personal goals.

[disneysteve]

i see..thanks steve for the advice..wow, it looks like i may be in bad shape here..

Not necessarily. Tell us more about your situation - income, current expenses, any other debts, etc. - and we can give you better advice as to how to move forward toward your goals.

[JohnCPVT]

Tell us more about your situation - income, current expenses, any other debts, etc. - and we can give you better advice as to how to move forward toward your goals.

Hi Steve,

I make 65k / yr
i get paid weekly..so after taxes, and 3% going into 401k, i get about 880 per paycheck. so per month, that's 3520 (but some months have 5 weeks in them). .the good thing is, i currently don't pay rent, i'm living at home with the folks, until i can get better situated financially....but i do help them with some of the utility bills for their home..so, the breakdown of the expenses ($600):

$39 - gym
$140 cable / internet
$81 - car insurance
$90 - cell phone bill (family plan, 2 lines)
$50 - school loans

my current debt is as follows:

credit card - 2100
credit card #2 - $500
school loans - $8000


Thanks for the help!

JP

[Broken Arrow]

Early withdraw penalty: I originally mistakened it to mean you were thinking about getting a 401k loan. I see now that you had meant to say that you were planning to withdraw it out early. Yeah, that's a really bad idea. The better option is to simply get a loan against it.... Now, I'm not saying that's a good idea either; just better than early withdraw.

Your cable/internet is really, really high. I would call your provider to see if they can reduce it. If they can't get it down, I would cancel it.

Any way to lower the cell phone bill as well? I would make sure that it is as efficient as possible for your actual usage.

Honestly, your debts balance doesn't look all that bad... but the interest rate is insane. Yeah, I know this sounds crazy, but perhaps a 401k loan would be worth it in this case... if only to get rid of the credit card debts. I would leave the student loans alone for now and focus in on the consumer debts.

[Frugalicious]

I agree using the 401K to pay off credit cards is a no no.
The credit card debt is not much, but the interest rates are way too high.
Do you have decent credit scores? Maybe get some new 0% cards to do BT's to from existing cards that are 20-25% interest??
Search the Markber thread here for 0% cards, or go to cardoffers.com

Otherwise, pay as much extra as you can to each card, starting with the card that has the highest interest rate.

Also, you may try calling each credit card issuer and ask (beg) them to lower the interest rates.