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Should I drain my qualified accounts to pay off credit card debt?

Hi,

I am 24 years old and since college have been carrying credit card debt. However, I ran a debt of about $2k at 22 to maxed out at $9k. I learned a lesson early in life which is good but I currently carry a balance of $9k paying about 18% APR. My cards are maxed out and my credit score has gone from 740 to about 660 in the last 18 months.

I have about $7k in a 401k. $5k in traditional and $2300 in roth. I have a $500 safety net but that is about it.

I make around $65k a year, have $2500 a month in bills and commitments and have not been able to curtail my spending enough to pay the debt off even though it is always top of mind.

My question is should I use the money from my qualified accounts to pay off my credit card debt?

Thanks for the help,

Sep 02, 2014 by Alex from Milwaukee, WI in  |  Flag
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4 votes

From what you shared, you should have $35,000 in discretionary income - perhaps less if you didn't account for taxes. In 3-6 months, you can pay off that debt without touching your retirement accounts - that's what I would advise.

You've already identified the problem - inability to curtail spending. The trouble with unbridled spending is that a higher income won't fix it. If you made $100,000, the urge to splurge would grow in step with your income.

Consider transferring the balance to a new card with a 0% intro offer for 12-18 months if you can. That will buy you some time. Then invest in a personal finance course at a local college or a Dave Ramsay type course to get a handle on your spending.

Best wishes!

Comment   |  Flag   |  Sep 03, 2014 from Midland, MI

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2 votes
Layton Jacob Cox Level 11

Tough love is sometimes the only kind of love that works.

You need to stop spending money. $9,000 is nothing. You could pay it off in 3 months if you dug your feet in the ground and said enough is enough.

Don't use the money from the qualified accounts. Eat beans and rice for 3 months and kill your debt. Don't go out with friends, don't go out to dinner, no trips, just pay the bills and throw money at the debt until it's gone.

Write the goal down that you want to pay off all $9000 by the end of the year ($2250 a month). Sign up to automatically deduct $2250 a month from your account at the beginning of each month. Then when January comes around, you will be: debt free, have a better credit score, and be able to go hang out with friends or do anything else you want without a feeling of guilt.

Tell yourself no, and change your life.

1 Comment   |  Flag   |  Sep 03, 2014 from Tucson, AZ
Colin

$2500/month in monthly commitments? If you don't have a car loan/student loan (or both) then I'm presuming you live in a place that's too expensive. Regardless, draining from your retirement savings is a horrible idea, not to mention a taxable event (in most cases). Let that money go to retirement and find other corners to cut. $2500 a month sounds awfully high unless a significant chunk of it is going to both a car & student loan.

Flag |  Sep 03, 2014 near Oak Creek, WI

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1 vote

Others have given good advice. You should try to pay off your credit card balance with your current income. While a loan from the 401k plan might be tempting, you need to be disciplined and have the will power to get your spending under control. Good luck!

Comment   |  Flag   |  Sep 03, 2014 from Newport Beach, CA

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Alex,

Generally, I wouldn't recommend draining retirement accounts to pay off credit card debt. You are young, and the savings you've already have accumulated have a long time to grow, which could set you up for a more secure retirement later on. You mention that you’re having trouble curtailing your spending. Why is that? I suspect that the real challenge is not that you don’t make enough money, but your spending habits. You state that your income is $65,000 and your bills are $2,500 a month or $30,000 a year. Therefore, you are under-estimating your expenses or you would be saving a lot more money. I recommend a budgeting tool like Mint.com to help you understand and budget your expenses.

Even if you liquidate your retirement savings to pay off debt, you’ll end up back in the hole if you don’t take a hard look at where your money really goes. You may benefit from sitting down with a financial advisor (someone who does hourly-fee planning might be a good fit for you), who will help you analyze how you spend money and determine what you need to change to get on track. Visit NAPFA.org to search for hourly-fee financial advisors in your area.
Also, while paying off your credit card debt is important, I’d advise you to beef up your emergency savings. Even a relatively minor car repair or last-minute plane ticket back home to deal with a family situation would quickly eat up all your available cash. Then, you’d likely end up turning to your credit cards again as a bail out.

Comment   |  Flag   |  Sep 19, 2014 from Township of Anderson, OH

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Urban C Fleming Level 8

Jeremy has a great idea, there are too many offers at 0% to leave it. If you can't find a good offer, use a loan at 8 to 10% for 18 to 24 months.

Comment   |  Flag   |  Sep 04, 2014 from Jacksonville, FL

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