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Credit Card Paydown Method


sabwafare2001
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I have some credit card debt for one card to pay off or pay down and the 25% interest has kicked in. I'm looking to eventually apply for a mortgage and would like to be in the best position possible. I would like to know the best method to pay it down:

 

1. Simply paying down the debt. At the moment the interest is higher than the principal. At the moment I cannot pay more than the minimum amount due.

2. Apply for a card with 0% for a period of time to transfer the balance.

3. Use a 401k loan at 5.25%. The monthly payment will be less than the credit card up to a certain point. It also will become income if I change companies. I positive thing is that the loan will not show on my credit report.

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That 25% APR is insane.  Avoid cards like that like the plague.  Anything with a double digit APR should NEVER have a balance that cannot be paid in full.

 

As to HOW to pay this off since you cannot pay it in full with your current savings/checking, the best option is to pursue a card with a no-fee, zero percent balance transfer offer. 

 

Using the 401K is not advisable on multiple levels, not the least of which is that the funds are likely not going to be working towards the intended retirement purpose when they have been used for a loan.  You would also need/want to review any tax-related implications.  I have never done a 401K loan and cannot speak to what triggers taxable events.  Others here on CB will be able to give better guidance in that regard...

 

You may also want to check with your small, local bank with whom you should have a relationship.  A personal loan should be available at a low APR and that would have a twelve to 24 month payout structure.  The sooner you pay the loan off, the better a future risk you will be to the bank for future lending needs...

 

Regardless of which option you choose, DO NOT simply make minimum payments.  You need to be able to work on making more than a minimum payment, especially since you are trying to prepare for a mortgage.  It is also concerning that you have no reserves upon which you are able to draw to pay THIS account.  The lack of reserves will be a concern for a mortgage lender, especially as we appear to be moving to yet another pseudo-crisis in the real estate markets...

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6 hours ago, sabwafare2001 said:

 

2. Apply for a card with 0% for a period of time to transfer the balance.

 

This is by far the best option.  Once it's repaid, stockpile money like crazy before you buy a house.  

 

Recently we had to replace an HVAC system ($10,000) and a water heater ($1,300) within a span of two weeks.  

 

Rather than stress us out, I obsessed for about three minutes about which credit card to use to max out the rewards we'd get back... knowing full well that regardless of which card I chose we'd just pay the statement balance in full by the due date and move on.

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Reason I suggested a 401k loan is because I currently have one that's almost paid off. Used it for a down payment on our current home about 6 yrs ago. Therefore I not that worried about tax implications. However I understand why it's a bad idea. Although it ended up being a good investment since we have 100K+ in equity at the moment.

Because of that we would have the equity as reserves from the sale of our home.....if we do sell.

 

I understand about the credit card interest rate and I let it get out of hand by not paying it off. Also haven't been able to fully recover after bankruptcy un 2015 to obtain a card with lower interest rate.

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10 hours ago, sabwafare2001 said:

Reason I suggested a 401k loan is because I currently have one that's almost paid off. Used it for a down payment on our current home about 6 yrs ago. Therefore I not that worried about tax implications. However I understand why it's a bad idea. Although it ended up being a good investment since we have 100K+ in equity at the moment.

Because of that we would have the equity as reserves from the sale of our home.....if we do sell.

 

I understand about the credit card interest rate and I let it get out of hand by not paying it off. Also haven't been able to fully recover after bankruptcy un 2015 to obtain a card with lower interest rate.

The interest rate on a credit card doesn't matter if you use the card properly -- and pay the statement balance in full every single time.

 

I have no idea what any of the APRs on my ~30 cards are, but even with FICOs well into the 800s I'm sure I also have some in that general range (I still have a couple of turd cards from Synchrony, as well as a Macy's store card, for example).

 

With good credit you might be able to find a credit union card somewhere that offers a card with a sub-10% APR, but you shouldn't be paying 9.99% interest on your Netflix bills or the lime green clam diggers your kid just had to have last Christmas.

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401-k loan is a last resort. 

 

You don't say what your card balance is, nor give us an idea of what your 401-k balance is either.  So it's impossible to give concrete advice.  But among all the reasons typically cited why you shouldn't tap 401-k money to get out of debt, a big on in my book is "it's simply too damn easy".

 

I'm not looking to admonish anyone here (and if I were to, I'd start with myself ... get that I'm speaking from experience).  But the same habits that led you to run up a balance at an abhorrent interest cost will tend to lead you there again unless you make some gut-wrenching changes to your budgeting habits.

 

I doubt I need to say more.  But, at minimum, start tossing $100-$200 automatically out of your pay a month, that's only to be tapped on a "next to last resort" basis to bail you out of this, or some other situation, down the road.

 

You don't stipulate specifics of your credit situation (particular, FICO scores), so again it's difficult to make a firm recommendation on how best to address your situation.  Assuming reasonable credit access, then the suggested 0% bt outranks, by far, all other alternatives on the list.

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Sorry about the lack of info, I'm kinda embarrassed. My credit scores are in the 620s to 650s. Down because of high CC utilization. I've only applied for one BT card so far and got denied. I fear applying for others will yield the same outcome. Also personal loans will have a higher interest rate than the highest CC. I have not inquired about a personal loan from the credit union.

 

I have 2 credit cards with balances:

Capital One 9600/10000 at 25%

Credit Union 2700/5000 at ??(mid teens)

Nebraska Furniture Mart  650/3000 at 0%

 

The Cap One started out as 0% for 12 months, but didn't payoff in time. There was a big reason why it was not paid off which will not occur anymore. 

Also We have cut a few of our expenses to have more cash flow and the 401k loan being paid off in about 5 months would yield about $190 extra per month.

However I do realize if we do sell our home this summer and move into an apartment temporarily, that would remove all debt. 

 

The balance in my 401k is about 39.5K

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Ok ... first, never be embarrassed about simply laying out your details here.   The great majority of us are here to be supportive in your efforts to improve your circumstances (and the slim minority who have other agendas can pretty much be ignored ;) ).  Most of us have been in more dire straits than yours.  (Over time, I rebuilt to solid 800+ FICO's from a 530 bottom.)

 

You have a strong handle on your situation; high utilization is the key culprit to your depressed scores.  When that's resolved, your scores are likely to improve to 680+, which will likely make you eligible for most types of credit (and a spitting distance from 720+, yielding access to the best "prime" options).

 

I expect that the Capital One account is bleeding $300/mo in min payments, with about $2000+ going to interest annually.  That's a hemorrhage in need of immediately triage.  I personally agree that in this circumstance, a loan from your 401-k is warranted.  (And congratulations for amassing a significant fund balance!)

 

It still stands as a "last resort" option.  I'm biased by my own history, having had an outstanding loan when I was let go by my employer, without resources from which to repay it (or available credit refunding).   Setting aside the tax liability/penalty, this was a permanent impairment to my retirement savings.

 

There's also the issue re foregone investment income.  The "interest" you pay is no substitute.  You can mitigate this impact by effectively borrowing 401-k funds presently invested at lowest risk (e.g. a guaranteed fixed rate fund, short-term investments in governments securities, etc.).  After the loan, transfer funds out of such funds into higher risk equity funds to the extent that they were partially drawn down to fund the loan.
 

With the $300 freed up from your current CapOne credit card payment, you should be able to amortize your 401-k loan over 3 years.  (As you're able to, it would be prudent to save additional funds on the side, even if modest, for pay off this loan early.

 

I largely suggest you pay down the credit union card from your standard resources.  With the $190 freed up from your existing 401-k loan this summer, you should be able to repay the outstanding balance within 18 months.  (You may wish to tap an additional $600 from your 401-k balance to accelerate the repayment and bring your balance to about 40% of the CL, for the sake of immediate score improvement.)

 

That's pretty much my take on things here; trust others will balance with their input.

 

 

 

 

 

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