I am committed to paying off my credit cards ($25,000 worth). Here's my question - should I take a loan out from my 401k - at an 8.25% interest rate, to pay down a credit card with an 11.99% interest rate? On paper it looks good, but I know I will be missing out on the amortization of the money in my 401k. On the other hand, I would be paying myself back, and not the credit card company. Is this a smart move?
From: Working Hard
Congratulations on taking steps to pay down your credit card debt. However, we do not think it's a smart move to borrow from your 401(k). You're a smart cookie because you've pointed out yourself that the 8.25% interest rate isn't the true cost. You're also going to be losing the interest you'd be earning on the 401(k) if you didn't touch the funds. Plus, if you leave or lose your job, you might have to repay the whole amount borrowed within three months. And if you can't do it, you'll owe income tax on what you borrowed, plus a 10 percent penalty if you're under 59-1/2. We think that's a very risky proposition.
A really cheap way to pay off credit card debt is to transfer balances to 0% APR cards. But you have to really read the fine print and make sure you make the payments required and follow their rules to get the attractive interest rate. Be over-cautious. If they say it only lasts 12 months, be prepared to transfer again or pay off the balance in 11 months. You can try applying for the Chase Platinum Card, which offers 0% APR for balance transfers and purchases for 12 months (regular APR is 10.99%) with no annual fee. You've got to have pretty good credit, though. Click the link to apply online: http://www.ncsreporting.com/LinkTrack/Redirect.asp?LinkID=CHP121760.
The smartest way to pay off your credit card debt is to bite the bullet. Track your expenses diligently for a month and see where you can make adjustments. Then start paying down your debt aggressively, starting with the highest interest rate card. (It sounds like you only have one, so just keeping paying that back.) To have a chance of making a dent in the debt, you've got to double, triple, even quadruple your minimum payment. Pay as much as you can each month so that the payment is being applied to eat away at your principal debt and not just to keep up with the finance charges. Good luck!