Am I making choice?
12-31-2011, 02:54 PM
#1
Am I making good choice?
Recently I've been making a conscious effort to reduce my debt and try to raise my credit score. Right now I'm at about a 680 fico score and haven't missed any payments in about 7 years. The good, I purchased my first home a little over a year ago and only owe about 10K @ 2.9% on my 07 Acura TL. The bad, I have about $8800 in debt mainly cc's and a loan. The rates on these balances vary anywhere from 13.99 to 19.99%. I had been making payments in the range of $150-200 a week on the cards to try and pay them off faster, but even so the finance charges are about $65 a month on one of the accounts.
I was looking at different options and came across the option of taking a loan from my 401K @ a rate of 3.25% and a $50 processing fee. I applied and asked for 9000 and by the terms if I take it for the full term (which I won't ) I would only be paying $803.11 in interest and there is no fees for paying early. My idea is payoff all cc's, drop the limit on my one card to about 2K for emergencies, close the others, and payoff the previous higher rate loan. Basically I want to use it for a consolidation loan and clean up my credit. Is this a good idea and also will this help raise my credit score or will the large payments not help me? Thanks in advance!
I was looking at different options and came across the option of taking a loan from my 401K @ a rate of 3.25% and a $50 processing fee. I applied and asked for 9000 and by the terms if I take it for the full term (which I won't ) I would only be paying $803.11 in interest and there is no fees for paying early. My idea is payoff all cc's, drop the limit on my one card to about 2K for emergencies, close the others, and payoff the previous higher rate loan. Basically I want to use it for a consolidation loan and clean up my credit. Is this a good idea and also will this help raise my credit score or will the large payments not help me? Thanks in advance!
Last edited by BlueAc; 12-31-2011 at 02:59 PM.
12-31-2011, 03:36 PM
#2
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Your 401K loan is essentially from yourself. Loaning yourself money (and paying yourself interest) is certainly better than loaning from a CC and paying THEM interest. The question is how much appreciation will you lose on the withdrawn money compared to interest you pay back.
Once paid off/paid down, do not lower your CC limits and do not close the accounts (unless you'll incur fees). If necessary, simply destroy the cards so you can't use them. Part of your credit score is available credit - the more available credit you have, the higher your score. Until you use it, then it's "unavailable" credit.
Once paid off/paid down, do not lower your CC limits and do not close the accounts (unless you'll incur fees). If necessary, simply destroy the cards so you can't use them. Part of your credit score is available credit - the more available credit you have, the higher your score. Until you use it, then it's "unavailable" credit.
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BlueAc (01-02-2012)
12-31-2011, 04:32 PM
#3
Team Owner
Couple of things to consider:
If you have to close your 401k because you quit or get fired from your job then you have something like 60 days to pay back the loan or the IRS is going to treat your loan as a taxable distribution. You will owe income tax on that money plus 10% penalty.
As Bearcat94 says, don't lower the limits on your credit card(s). That can actually lower your score because you will be in debt on a higher percentage of your available credit.
If it were me I would look for a new card that offered a balance transfer deal. You can probably find someone offering very low interest rate (maybe 0%) for some length of time. Just make sure that you understand what that rate will reset to after the introductory time period. Be careful that the transfer is not treated as a cash advance as those rates are sky high. Also, do not charge anything on a card that you have done a balance transfer to until that balance transfer is paid off. Why? Because they will fuck you. They will start charging you the normal purchase interest rate on the new charges and you will be trapped paying that because it's impossible to pay off the new purchases until after the balance transfer is paid off. Also, it's probably not a good idea to do a balance transfer to a card that you have a purchase balance on. In short the card should have $0 balance before you do a balance transfer to it.
If you have to close your 401k because you quit or get fired from your job then you have something like 60 days to pay back the loan or the IRS is going to treat your loan as a taxable distribution. You will owe income tax on that money plus 10% penalty.
As Bearcat94 says, don't lower the limits on your credit card(s). That can actually lower your score because you will be in debt on a higher percentage of your available credit.
If it were me I would look for a new card that offered a balance transfer deal. You can probably find someone offering very low interest rate (maybe 0%) for some length of time. Just make sure that you understand what that rate will reset to after the introductory time period. Be careful that the transfer is not treated as a cash advance as those rates are sky high. Also, do not charge anything on a card that you have done a balance transfer to until that balance transfer is paid off. Why? Because they will fuck you. They will start charging you the normal purchase interest rate on the new charges and you will be trapped paying that because it's impossible to pay off the new purchases until after the balance transfer is paid off. Also, it's probably not a good idea to do a balance transfer to a card that you have a purchase balance on. In short the card should have $0 balance before you do a balance transfer to it.
Last edited by doopstr; 12-31-2011 at 04:41 PM.
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BlueAc (01-02-2012)
12-31-2011, 07:40 PM
#4
on the 0% credit card offers. If you're not receiving them already...they're not as often as they used to be, but they're still out there...seek them out. I juggled CC debt in 2006-2008 around various 0% offers (back then I was getting them as 0% & no balance transfer fee offers) and saved a TON on finance charges.Now I have a nice stack of credit cards in my desk drawer
. I keep my credit union VISA card and my Costco AMEX card in my wallet for emergencies and do not revolve any balance.
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BlueAc (01-02-2012)
01-02-2012, 04:32 PM
#5
Get a loan from a local credit union w/ a low interest rate and pay your debts in full. Taking a loan out via 401k is basically you kicking your own self in the arse. You will lose interest on invested amounts, face tax penalties, and outrageous fees/rates to loan yourself your own money via whomever is your 401k policy holder. Thats just a bad deal, either roll your account over to a Roth IRA (where withdrawals are way more flexible ) or as stated before, take out a low interest loan to compile all debt into one monthly payment. GL in w/e you choose.
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BlueAc (01-02-2012)
01-02-2012, 04:57 PM
#6
Thx for alll the suggestions. I understand what all you are saying about trying to get a loan from my cu or take out a 0% cc for bt's. However due to derogatory info from my past I always get shot down for new cards and my cu wasn't willing to even lower the rate on my current loan because of my credit score. Therefore I went ahead and did the 401K loan. My plan is to pay this off in about a year and a half. Hopefully when all is said and done I will have made the right decision.
I appreciated the suggestions on not closing my accounts. I went ahead and shredded all but one of my cards and put they survivor in my sock drawer... lol! It was weird going out this weekend w/o a cc in my wallet but one thing is for sure I didn't over spend!
Lastly if you guys have anymore suggestions on ways to improve my credit I all ears! Thanx
I appreciated the suggestions on not closing my accounts. I went ahead and shredded all but one of my cards and put they survivor in my sock drawer... lol! It was weird going out this weekend w/o a cc in my wallet but one thing is for sure I didn't over spend!
Lastly if you guys have anymore suggestions on ways to improve my credit I all ears! Thanx
01-05-2012, 08:29 AM
#7
Drifting
If it is only a year you should be fine. Hopefully you are cutting the spending habits that got you in the situation too!
At least you are taking measures to reduce your debt, and like it was said, do not close the other credit cards, just toss the cards or don't use them.
At least you are taking measures to reduce your debt, and like it was said, do not close the other credit cards, just toss the cards or don't use them.
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01-05-2012, 10:31 PM
#8
Drifting
With today's economy, you need to be pretty sure that your job is stable enough to take on the 401k loan. If you should lose the job, then you need to pay the loan quickly (not sure of how much time you get) or you will get dinged for a 10% early withdrawal penalty plus paying tax on the income from the withdrawal- hardly something you want if you lose your job.
If you are disciplined, one approach would be to temporarily stop contributing to 401k and pay proceeds directly to the CC debt. If you complete this in a given tax year- you can always pay a lump sum in an IRA to get the tax advantages you would be forfeiting while not contributing. The advantages of this plan is it's simple, you don't have to pay any processing fees, and you escape the potential of being really strapped for cash if you should lose your job in the future. But once again- you need to be disciplined to make that work.
Of coarse the disadvantages are also present: higher income taxes and loss of growing that money for the years to come. I would definitely reduce 401K contributions to pay off that 19.9% balance if that has the higher balance. The SP500 was flat last year (0% gain effectively) and you get a 19.9% GUARANTEED return paying off that debt which is a no-brainer for me. However, once you do pay off the debt you have the ability to open an IRA and do more with your money that you probably can do in the 401K- if you're good you might just outperform your 401k funds and be better off 20 years from now.
Not to preach (much), but you want to also learn how you got into a situation where you're paying 20% for debt in a 4-10% world and what you'll do different in the future. It's usually because we want stuff now and refuse to save for it instead. Credit makes it pretty easy to buy things that you would not otherwise get if you could only pay with cash.
If you are disciplined, one approach would be to temporarily stop contributing to 401k and pay proceeds directly to the CC debt. If you complete this in a given tax year- you can always pay a lump sum in an IRA to get the tax advantages you would be forfeiting while not contributing. The advantages of this plan is it's simple, you don't have to pay any processing fees, and you escape the potential of being really strapped for cash if you should lose your job in the future. But once again- you need to be disciplined to make that work.
Of coarse the disadvantages are also present: higher income taxes and loss of growing that money for the years to come. I would definitely reduce 401K contributions to pay off that 19.9% balance if that has the higher balance. The SP500 was flat last year (0% gain effectively) and you get a 19.9% GUARANTEED return paying off that debt which is a no-brainer for me. However, once you do pay off the debt you have the ability to open an IRA and do more with your money that you probably can do in the 401K- if you're good you might just outperform your 401k funds and be better off 20 years from now.
Not to preach (much), but you want to also learn how you got into a situation where you're paying 20% for debt in a 4-10% world and what you'll do different in the future. It's usually because we want stuff now and refuse to save for it instead. Credit makes it pretty easy to buy things that you would not otherwise get if you could only pay with cash.
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whudini3000 (01-07-2012)
01-06-2012, 10:15 PM
#10
Drifting
^ In today's market, a 680 FICO score will not get you any low-interest loan for an extended time- sure maybe six months with a teaser rate and then wham you'll be at a higher rate. I have a 800 FICO and all my cards are between 10-16%. but it doesn't matter to me because I pay off the cards each month and thus don't pay any interest.
It's better to simply pay off the balance ASAP than any other alternative discussed. Sure it's hard and involves some sacrifice, but it also keeps you from running up more credit. Taking a 401K loan sounds easy but also has risk if you lose the job, plus you're still paying 3.5% in a 1% CD world for what we're talking about. It also won't necessarily solve the problem that caused the situation which is spending more than one can really afford.
You will rarely make more on your own than what you're paying in the interest for the credit card so it's silly to let debt even at 8% accrue in today's market.
For example, you make a whopping 1% on a 21 month CD for the 10K balance that is being discussed in this thread. Even paying the 3.5% on a 401K loan is more than triple what you would get having a CD of same amount so naturally it pays to pay off the balance that is costing you the most. Pay off the 19% balance first and then focus on the other account afterwards.
It's better to simply pay off the balance ASAP than any other alternative discussed. Sure it's hard and involves some sacrifice, but it also keeps you from running up more credit. Taking a 401K loan sounds easy but also has risk if you lose the job, plus you're still paying 3.5% in a 1% CD world for what we're talking about. It also won't necessarily solve the problem that caused the situation which is spending more than one can really afford.
You will rarely make more on your own than what you're paying in the interest for the credit card so it's silly to let debt even at 8% accrue in today's market.
For example, you make a whopping 1% on a 21 month CD for the 10K balance that is being discussed in this thread. Even paying the 3.5% on a 401K loan is more than triple what you would get having a CD of same amount so naturally it pays to pay off the balance that is costing you the most. Pay off the 19% balance first and then focus on the other account afterwards.
01-07-2012, 02:27 PM
#12
tidbit; focus on ways to "make money" vs. focusing on paying off debt. Incorporate discipline in this approach and you will be better off in the longterm. In the past I've found, focusing on debt hindered my ability to focus on ways to make money. A couple of old heads who introduce me to this thought process and it has yielded great results.
01-07-2012, 02:27 PM
#13
Drifting
The problem with threads like this is the important data is missing or convoluted for giving the best advice. Take this thread, I see that there is 10K at 2.9% (good) for the car, but there is NO mention of the $ amount that is at 20% and the $ amount at 14%. If the bulk of the debt is at 14% then there's not a lot of savings going to 10% in the grand scope of things. Naturally, if the bulk is at 20% then there is some merit to refinancing to 10%.
Based on the $65/month of interest for one account, I have to assume the bulk is at 14% and there is a smaller portion of debt at 20%. It's a no-brainer to over-pay the 20% account FIRST before overpaying the 14% so I would suggest that ASAP.
We also don't know how much the OP contributes to the 401K each year either- it it's 5-9K a year then it's also a no-brainer to not contribute to the 401K and pay off credit card debt instead. This of coarse assumes that the OP doesn't repeat and get back into 10K of CC debt again.
If the OP isn't saving 8-15% in the 401k- he shouldn't be owning a TL and should downgrade to a car that he can afford so he can save at least 10%.
I think if the OP asked Suzie Orman for advice on this subject, he would get very similar advice and comments as this.
Based on the $65/month of interest for one account, I have to assume the bulk is at 14% and there is a smaller portion of debt at 20%. It's a no-brainer to over-pay the 20% account FIRST before overpaying the 14% so I would suggest that ASAP.
We also don't know how much the OP contributes to the 401K each year either- it it's 5-9K a year then it's also a no-brainer to not contribute to the 401K and pay off credit card debt instead. This of coarse assumes that the OP doesn't repeat and get back into 10K of CC debt again.
If the OP isn't saving 8-15% in the 401k- he shouldn't be owning a TL and should downgrade to a car that he can afford so he can save at least 10%.
I think if the OP asked Suzie Orman for advice on this subject, he would get very similar advice and comments as this.
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gr8ness97 (01-07-2012)
01-07-2012, 02:32 PM
#14
The problem with threads like this is the important data is missing or convoluted for giving the best advice. Take this thread, I see that there is 10K at 2.9% (good) for the car, but there is NO mention of the $ amount that is at 20% and the $ amount at 14%. If the bulk of the debt is at 14% then there's not a lot of savings going to 10% in the grand scope of things. Naturally, if the bulk is at 20% then there is some merit to refinancing to 10%.
Based on the $65/month of interest for one account, I have to assume the bulk is at 14% and there is a smaller portion of debt at 20%. It's a no-brainer to over-pay the 20% account FIRST before overpaying the 14% so I would suggest that ASAP.
We also don't know how much the OP contributes to the 401K each year either- it it's 5-9K a year then it's also a no-brainer to not contribute to the 401K and pay off credit card debt instead. This of coarse assumes that the OP doesn't repeat and get back into 10K of CC debt again.
If the OP isn't saving 8-15% in the 401k- he shouldn't be owning a TL and should downgrade to a car that he can afford so he can save at least 10%.
I think if the OP asked Suzie Orman for advice on this subject, he would get very similar advice and comments as this.
Based on the $65/month of interest for one account, I have to assume the bulk is at 14% and there is a smaller portion of debt at 20%. It's a no-brainer to over-pay the 20% account FIRST before overpaying the 14% so I would suggest that ASAP.
We also don't know how much the OP contributes to the 401K each year either- it it's 5-9K a year then it's also a no-brainer to not contribute to the 401K and pay off credit card debt instead. This of coarse assumes that the OP doesn't repeat and get back into 10K of CC debt again.
If the OP isn't saving 8-15% in the 401k- he shouldn't be owning a TL and should downgrade to a car that he can afford so he can save at least 10%.
I think if the OP asked Suzie Orman for advice on this subject, he would get very similar advice and comments as this.
I agree. Paying debt via 401k is a lose-lose situation. Either the op makes key sacrifices which include, downgrading lifestyle, pick up more work, stop contributing to 401k or stop paying his debt. Something has to give and it eventually will.
01-08-2012, 07:31 PM
#16
The problem with threads like this is the important data is missing or convoluted for giving the best advice. Take this thread, I see that there is 10K at 2.9% (good) for the car, but there is NO mention of the $ amount that is at 20% and the $ amount at 14%. If the bulk of the debt is at 14% then there's not a lot of savings going to 10% in the grand scope of things. Naturally, if the bulk is at 20% then there is some merit to refinancing to 10%.
Based on the $65/month of interest for one account, I have to assume the bulk is at 14% and there is a smaller portion of debt at 20%. It's a no-brainer to over-pay the 20% account FIRST before overpaying the 14% so I would suggest that ASAP.
We also don't know how much the OP contributes to the 401K each year either- it it's 5-9K a year then it's also a no-brainer to not contribute to the 401K and pay off credit card debt instead. This of coarse assumes that the OP doesn't repeat and get back into 10K of CC debt again.
If the OP isn't saving 8-15% in the 401k- he shouldn't be owning a TL and should downgrade to a car that he can afford so he can save at least 10%.
I think if the OP asked Suzie Orman for advice on this subject, he would get very similar advice and comments as this.
Based on the $65/month of interest for one account, I have to assume the bulk is at 14% and there is a smaller portion of debt at 20%. It's a no-brainer to over-pay the 20% account FIRST before overpaying the 14% so I would suggest that ASAP.
We also don't know how much the OP contributes to the 401K each year either- it it's 5-9K a year then it's also a no-brainer to not contribute to the 401K and pay off credit card debt instead. This of coarse assumes that the OP doesn't repeat and get back into 10K of CC debt again.
If the OP isn't saving 8-15% in the 401k- he shouldn't be owning a TL and should downgrade to a car that he can afford so he can save at least 10%.
I think if the OP asked Suzie Orman for advice on this subject, he would get very similar advice and comments as this.
Therefore the best option I saw was to take out the loan from my 401K. I have paid off all debt as of Friday and now I will start making my payments to the loan. I will be able to pay about 200 to 250 a week and get this loan knocked out pretty quickly. I honestly don't see the negative in what I have done. I see people saying if I lose my job I'm screwed. How so??? When now I'm in a better situation atleast in the banks eyes because I have no debt they can see ( 401k loan doesn't show on your credit report) I can simply take a loan to pay the 401K back, if I feel my job is in jeopardy.
I contribute 10% of my weekly salary to my 401K to answer that question. On top of that I had been saving about $100 a week and putting that in a rainy day account. I will put that towards my loan. As far as my car goes, why would I get rid of a car that I only owe $12,000 on? What would I downgrade to that would give me reliability I need to actually get to work and still be in that price range?
So as I stated I'm not in financial strains. However I am able to admit I have a problem with managing money and can guarantee you that I have learned my lesson. All cards have been cut with the exception of my emergency card and I'm paying cash only. My goal is to pay this loan off in a year and raise my credit score. I'll report back on how everything is going. Thx again for all the suggestion and advice!
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