We’ve been discussing ways to pay down outstanding credit card balances (and by “outstanding”, we don’t mean “really good”).
You should start by negotiating with your current credit card providers to try to get a lower interest rate, and perhaps see if you can leverage one provider’s offer against another to cut your interest costs.
But if those methods don’t help, it’s time to get a little more drastic. Here are some potential solutions, in order of “most preferable” to “worst-case scenario”.
1. Use your savings
Any extra money in your checking and savings account can get you an instant and ongoing double-digit return on investment if you use it to pay down (or pay off) your credit cards.
Once the balances are eliminated, you can use what you were making in monthly payments on the credit cards to instead replenish your liquid accounts. If you don’t close your credit card accounts, you can use them to cover any unexpected urgent expenses in the meantime.
But once you get to a “zero” balance, try to tuck the cards away for emergency use only. Any non-urgent expenditures should be guided by the principle of “If you can’t pay cash, you probably can’t afford it.”
2. Get an unsecured loan
Check with your bank or credit union to see if they can loan you what you need to pay off the card balances, and hopefully it will be at a much lower interest rate.
They also might extend the loan long enough to reduce your monthly payment below what you were paying for your credit cards, but you will still have the option of paying it off early if you’re able.
They may make you close out the credit card accounts as a condition of getting the loan, but that could turn out to be a favor to you. You could also check an online peer-to-peer lender such as Prosper (www.prosper.com), Lending Club (www.lendingclub.com), or Upstart (www.upstart.com).
3. Tap your home equity
As long as the total amount you owe on your home is less than 80% of its current value, you could save a lot of money if you use any available equity to pay off your credit cards. The interest rate on a home equity loan, line of credit, or new mortgage is likely to be in the low-to-mid single digits, and the interest may be tax deductible to you.
And like the consumer loan, you may be able to extend the length of the loan so that your payment is as low as possible, without a penalty if you can (and choose to) pay it off early.
But be aware that the upfront costs for the new loan can range from a few hundred dollars for a home equity line of credit, all the way up to a few thousand dollars for a traditional mortgage refinancing. Therefore, talk to your current lender to see what costs would apply to your situation. Then check with a few others locally, or contact a national lender like Quicken Loans (www.quicken.com).
4. Draw from your retirement funds
If your employer’s policies permit, you may be able to borrow against your at-work 401k without any credit check. You can usually borrow the lesser of 50% of the balance, or $50,000.
Roth IRA owners can withdraw the contributions to their accounts at any time for any reason with no taxes or penalties whatsoever. But if you withdraw the earnings portion, you may pay taxes on that plus a 10% penalty (especially if you are under 59½).
You could also pull money out of your IRA, but any withdrawal will be taxed as ordinary income, and the 10% penalty will also apply if you are under 59 ½. But the taxes and penalties incurred in the year of withdrawal could be much lower than interest charges you incur on unpaid credit card balances over the years.
Again, if you tap your retirement accounts, use what was once going toward your credit card bills to either pay down your 401k loan, or begin contributing to your retirement accounts as soon as possible.