Author Topic: Credit card debt 0% vs 401k question  (Read 3117 times)

Freeme

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Credit card debt 0% vs 401k question
« on: March 15, 2014, 06:32:40 PM »
We owe about 20,000 on credit card debt which is on a 0% card that ends dec 2014. I hate this debt and really want it gone. We will be able to pay it off by the end of the 0% expiration. We currently put into our 401k 6% to get my company match. My question is should we pay this off as planned or should we change our 401k contributions to a higher amount to save the 25% we would be paying. For example pay off 10,000 this year and put that in the 401k instead. I can easily get another 0% card for next year. I just don't know if my sanity can take 2 more years. We started off at 45,000 and have paid off 25,000 in the last year. It took a while but my husband finally got on board. This dept just drives me crazy but I don't want to be stupid about this.

MDM

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Re: Credit card debt 0% vs 401k question
« Reply #1 on: March 15, 2014, 06:45:05 PM »
If you have cut the debt from $45K to $20K in a year, then it appears you have your act together and can budget responsibly - congratulations!

Given that you have the psychological part in control, it thus becomes a very objective calculation: you will (assuming markets behave as they have) earn a higher return by investing in the 401k than by prepaying a 0% loan.

If you really can flip to new 0% cards, and any resulting drop in credit score is immaterial to you, then maximize the 401k and let the card repayment stretch.  Of course, if any of the above ifs evaluate to "false", different conclusions may occur.

Thegoblinchief

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Re: Credit card debt 0% vs 401k question
« Reply #2 on: March 15, 2014, 06:54:43 PM »
Is this your only debt? What's your tax bracket?

Most cc offers I see have a 3% fee to transfer, which cuts into your real rate of return unless you're in a high tax bracket but will be in a low bracket on retiring.

madmax

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Re: Credit card debt 0% vs 401k question
« Reply #3 on: March 15, 2014, 07:01:06 PM »
Mathematically, the 401k makes sense of course. However, to me debt represents risk and I don't like the stress  - I would pay it off ASAP. Your post seems to indicate that you feel the same way. Pay it off and let every payment sting so that you never borrow again.

RobertBirnie

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Re: Credit card debt 0% vs 401k question
« Reply #4 on: March 16, 2014, 12:13:46 AM »
I'd go for the debt. You never know what a year from now will look like, maybe there's another market tank and a credit crunch where you can't get another 0% credit card to roll the balance to. If it was a fixed interest debt like a student loan then it'd be different, but not on a credit card. I wouldn't be able to sleep.

And I don't recall any cc offers that don't have the balance transfer fee that Thegoblinchief mentioned.

Freeme

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Re: Credit card debt 0% vs 401k question
« Reply #5 on: March 16, 2014, 09:33:58 AM »
That is what my husband thinks pay off the credit card that gives piece of mind no matter what happens. I just also don't love leaving the tax savings on the table. We just got hit with a $5000 tax bill because we no longer can count my son as a dependant he makes too much money. Now this year have to pay the $5000 plus increase our deductions so we don't pay that again. I originally thought I could pay off the depth and put away an extra $10,000 to bring us to 17,500 but this tax bill put a damper on that idea.

dabears847

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Re: Credit card debt 0% vs 401k question
« Reply #6 on: March 16, 2014, 10:38:06 AM »
We owe about 20,000 on credit card debt which is on a 0% card that ends dec 2014. I hate this debt and really want it gone. We will be able to pay it off by the end of the 0% expiration. We currently put into our 401k 6% to get my company match. My question is should we pay this off as planned or should we change our 401k contributions to a higher amount to save the 25% we would be paying. For example pay off 10,000 this year and put that in the 401k instead. I can easily get another 0% card for next year. I just don't know if my sanity can take 2 more years. We started off at 45,000 and have paid off 25,000 in the last year. It took a while but my husband finally got on board. This dept just drives me crazy but I don't want to be stupid about this.

I was in a similar situation about six years ago, I spread the numbers on a few amortization schedules and came up with a plan

1. Max out or put as much into the 401k as we could afford
2. Obtained a zero interest loan from my 401k Loan, if there is interest then that is the required interest you will pay yourself on the loan.
3. The loan allowed me to continue my tax advantage savings (MAX) and with a higher amount going into savings vs. the lower post tax amount. My base line 401k balance kept rising while I also paid off all my debt fairly quickly.
4. I was able to quickly pay off higher cost debt (first was a 2nd Mortgage at 8%)