Should You Take Out a Loan From Your 401K For Credit Cards?

If there’s one question that people have when it comes to retirement, it’s how to actually balance their retirement needs with the other goals that they have with their financial life. For example, if you have heavy credit card debt but a nice nest egg, should you rob Peter Nest Egg to pay Paul Credit Card Debt? It’s a tough question, but there are some things that you might want to consider before you actually go through with taking out a loan from your 401K account.

First and foremost, you need to understand that it really is a loan — you will have to pay the money back with interest. That interest does indeed go back into your retirement account in some cases, but either way — it’s still due, and you will need to make sure that you actually pay it. If you don’t pay the loan back, it does become a withdrawal and unless you happen to be 59 1/2, it’s going to cost you 10% penalty plus having to pay income taxes on the withdrawal. It’s a pretty big bite:

Let’s say that you borrow 5,000 dollars, at a nominal interest rate. If you don’t pay back the 5,000, you will not only have penalties from the loan company, but you will also have to immediately take a $500 penalty (10%), plus you will have to roll the $5,000 into your total income — which can add substantial taxes to your bill if you’re not careful — $5,000 can be enough to push you from one tax bracket to another.

One of the reasons why we put money into our retirement account in the first place is to be able to actually save for the future. If you take money out of the account then you will naturally not have that compound interest magic working on that money. over time, this means that you will have a smaller nest egg than other people that actually held tight to their guns and got all of the money that were set out to receive.

Getting a loan from your 401(k) isn’t something that you can just get for free, either — you will have to still pay a fee, called a loan origination fee. This can range, which is why you will need to get a quote from the loan company to figure out how much money you will have to pay in order to get the loan. Now, this money will often be deducted from the total amount that you’re borrowing, so keep that in mind.

From an organization point of view, you also need to make sure that you realize that the money for the monthly payments will be directly taken from your paycheck every month. So you will need to adjust your budget as well — especially if you have things that are automatically withdrawn after your paycheck is deposited.

Now we have to come back to the original problem — should you do it in the name of paying down your credit card debt? Well, it depends on a few things. First and foremost, it depends on the amount of credit card debt that you’re trying to get rid of. If you think that you’re going to try to pay back all of them and they are all high interest cards, then you should definitely do that. On the other hand, if the credit card debt is manageable, it can be smarter to leave the money in the account and find another way to pay the credit card debt off early — like your tax return. It’s much better than blowing your tax return on a vacation that only takes you further from your financial goals.

Overall, this is something that you should definitely keep in mind if you really want to take a loan from your 401(k) to pay back credit cards.

Initial Steps to Get Rid of Credit Card Debt

Proper diet, exercise and, of course, enough sleep are equivalent to having a healthy lifestyle and happy personality.  However, a lot of people aren’t able to meet these factors because they are surrounded with so many problems; one of them is credit card debt.  Today, a significant number of Americans can’t sleep soundly at night because their credit card debts are bothering them – but there are ways to get these people to sleep normally again.  This is what this article is all about.

Ways to Eliminate Credit Card Debt

There are several ways to incur credit card debt, and there must also be several ways to get out of it.  Debt relief programs seem to be the many people’s resort as well as approaching credit counsellors.  There are many financial institutions who have been servicing countless indebted people in the U.S. for many, many years now, but it is only this year, 2010, that a large population have seen its importance and it is triggered mainly by the country’s current economic situation.

Feed Your Mind with Different Techniques

When you want to get out of debt, there is really no instant solution.  You have to equip yourself first with the proper techniques on how to deal with your credit card debt.  Read as many articles and testimonies as you can about debt relief or settlement programs before finally deciding to avail of them.  Know all the benefits that you can get from it as well as the requirements.  Debt relief programs, unfortunately, are not available for everyone – that is why you really need to know what the debt relief companies require.

What Causes Credit Card Debt

There are two possible causes of credit card debt.  First, you are overusing your credit cards and the second one is that you don’t have enough income to repay your debt.  Evaluate yourself what had caused your credit card debt and this time, there should be no denying.  Do not blame it on the high interest rates imposed by credit card companies since you already know right from the start that buying on credit entails interest.  Think of it this way, you are already in a very difficult situation and what you need is a very effective solution.  Find ways that can you think can put an end to your credit card debt.  You can, for instance, avail of a debt relief program and at the same time increase you monthly income.

Keep Your Credit Card Debt Under Your Control

Your credit report is a very important factor in your life, even though you may know nothing about it. If you try to borrow any type of money for anything, the lender will access your credit report to see what sort of borrower you will be. Many people are unaware that this goes on behind the scenes. But if you apply for a credit card, whether it is online, over the phone, or by post, your credit report is verified before a decision is made.

Many credit card and loan companies will have a clause in the small print which is known as a universal default clause. This stipulates that if in the eyes of the company you suddenly become a bad risk, they can raise the interest rates on your borrowing without explanation to you. The companies periodically check their customers’ credit reports and if anything is highlighted or shows up as a risky development, they will act to protect their lending. This could be something as simple as you paying a bill late, or being late with a credit card repayment.

If there is a sudden change in habits, for example, if someone takes out more cards suddenly or increases their borrowing, then the company may view this with suspicion. They can build up a customer profile and any activity outside this profile means that the person may be quickly going up into the risky category.

The trouble is that any existing borrowing you may have will suddenly become hugely more expensive. After the interest is compounded, a tiny change in the interest rate can mean the equivalent of hundreds or thousands of dollars added onto the whole loan.

To protect yourself as much as possible from these sudden changes, you can do a few things. Obtain a copy of your own credit report and go through it to make sure that all the entries in it are correct. Does it still show old borrowing which you have already paid off? Does it have your correct details? Sometimes, if someone has the same name as you, their credit history can become mistakenly added onto yours.

Also, keep an eye on your credit card bills. If you notice the interest rate has suddenly shot up, you are within your rights to phone the company to ask for an explanation. They may reduce the rate if you call them and give you a better deal. If not, then there are plenty of other cards where you can get yourself the best deal that you possibly can.