For several years after we got married, my wife and I couldn't get a credit card . We were able to survive just fine without one. But, we also saw an advantage to having one so, when we were finally given the opportunity, we did.
When we got our card and its $3500 limit, we agreed we would only use it in financial emergencies and we stayed true to that. However, what we weren't expecting was to have so many of those emergencies at once. First our water heater needed to be replaced. Then my car needed new brakes. Between those and several doctor bills, we maxed out our card in a matter of weeks and, as a result, found ourselves trying to budget a pretty high minimum payment.
I was very uncomfortable about that situation, mostly because, if we did have another large expense, we would have to find a way to pay it out of pocket while still trying to make our monthly payments on the card. So after some serious consideration, I decided pay it off using money I borrowed from my 401K.
This was not an easy decision for me. But, after weighing the pros and cons, I realized there were three very good reasons for doing it.
The first reason was the monthly payments would be considerably less. My monthly minimum on the credit card was $110. My monthly payment on my 401K loan is less than half of that. The only major trade off is the payment for the loan comes directly out of my paycheck. But, since I work on commission, all that really means is I need to get an extra sale or two to make sure my checks are still large enough to pay the other bills.
The second reason was the interest was being paid to me, not some bank. The credit card's interest rate was around 22 percent which pretty much meant someone was being made richer while I was being made poorer. Now, I'm only paying 4.25 percent and every penny of that interest is being re-invested into my 401K.
The last reason was my 401K would actually start to earn money as a result. My investments have been pretty stagnant for the past few years and, last year, I only earned about 1 percent. The money I'm repaying to my 401K as part of my loan is actually earning more percentage wise than it would be just sitting in the account. Obviously, that might change in the future. But, short-term at least, I'm coming out ahead by putting the money to good use.
I was a bit nervous when I made the decision to borrow money from my 401K. But, by not having that credit card debt to worry about and having my money earn more as a result, I think I made the right decision and would recommend this step to anyone looking to reduce their debt.
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- Banking & Budgeting
- credit card