I unfortunately accumulated a lot of credit card debt due to medical bills.
I have two credit cards
1. Card one
18 k balance – %17.49
- Card two
17k balance – %26.49
35years old.
I have 47k in a Roth, on top of two 401ks my wife and I have.
12k in savings, 6k in cash
I have 800-1000 extra each month to use towards debt, on top of minimums.
My question is, would you pull 12k from Roth and use 5k savings to wipe out card2? Pull out enough to wipe out both?
I would like to keep as much emergency fund as possible.
I know you shouldn’t touch retirement due to compound interest, but would like feedback.
Posted by jjisu84
13 Comments
Seek a 0% balance transfer credit card to give yourself 18 months to pay off a portion of this interest free.
Only use you retirement if you never plan on retiring.
Honestly you arent earning that in gains. Between you and your wife you can refill your roths accounts in 2 yrs. Maybe you could take out a 401k loan instead though. I would prefer to have more roth money than 401k money
Don’t touch the Roth money you would be way better of getting a bank loan
Given you can pay extra toward the debt each month and have savings in place to help I’d suggest looking for a balance transfer for a 0 or lower APR if you can.
Taking out of your Roth or 401k given the fact that you can pay more than minimum payments is generally a really bad idea. To take away a huge chunk of retirement now while it still has so many years to grow is a really staggering amount. For example at an annual return of 8% over say 30 years left to work (if that’s your plan but adjust to however much longer you aim to) would be about $350k.
Use your savings to pay off card 2. Transfer card 1 to o% card. Pay it off aggressively. Once done replenish your savings aggressively.
As an upcoming retiree I can tell you I wouldn’t touch Roth money. It’s too valuable at retirement. If you have $1000 a month on top of minimum just do that. You will have it paid off in short order. Put the full amount on card 2. Try to get the debt moved to something with a lower interest rate.
Lawyer here (not your lawyer). We tell our clients NEVER take money out of a Roth or 401k to make an unsecured creditor. If you stopped paying your credit cards, and your credit card company got a judgment against you, in just about every U.S. State (including Florida, where I practice), the creditor could not touch your 401k or ROTH IRA.
Your ROTH and 401k are for retirement. FULL STOP. This money is exempt from the claims of creditors. If you withdraw funds to pay a credit card debt you have to pay penalites. Having 35k of credit card debt at an average of 22% interest costs you $7,700 (.22 X 35,000) of interest a year (more than $600 a month). You are a hampster running on a hamster wheel, working to pay interest never getting anywhere.
If you filed bankruptcy, you likely would wipe out that $35,000 and the credit card companies with get nothing of close to nothing.
Your first move is to call each credit card company and tell them you have a temporary finanancial hardship and realize that you are just treading water and are in danger of default. I have never missed a payment but I do not have a way of fixing this absent banktuptcy, can you lower my interest to 9.9% of 6 months so I can make prgress toward paying this off. If they say no speak to a supervisor. If the supervisor says no, miss a payment or two and repeat the call. Tell them they can close the account if they lower your rate to 10%. (You are asking for 10% but just curtting the 26% to low teens would be a huge help).
A Roth witdrawal is also the wrong move becuase you have 12k in savings and 6k in cash. The idea that you might get 1% to 2% interest to leave your money at a bank, in savings account and that bank might lend you your own money back on a credit card at 17% of 26% is beyond crazy. You could bring your savings account from $12k to $2k and save $2,650 of interest.
Medical bills can usually be negotiated. NEVER put them on a credit card. If you have a $10,000 medical bill and your health insurance carrier reduces that bill from $10,000 (retail) to $5,000 (contracted rate) and pays $3,500 and says you have a co-pay of $1,500 many health providers will settle the $1,500 for less a few months post care. This is especially true if you pay your co-pay at the time of service, and the medical provider, after they get paid, wants you to pay a second time after previously telling you what your co-pay would be and collecting it at the time of service.
I wouldn’t pull from your retirement funds. You can have this knocked out in ~3 yrs. Likely less if you cut your spending elsewhere and pick up some extra work.
Also, in the future, don’t use your credit cards to pay for medical debt. There’s a lot of other options to pay and get the amount reduced when it’s still with a hospital/doctor, and most facilities will work with you to set up 0% interest payment plans.
Medical bills are zero interest, extremely flexible, and extremely negotiable. Credit card debt is none of those. Don’t pay medical bills with a credit card.
You gotta figure out why with two stable incomes youre still in debt
I’ll give you the opposite advice from someone who actually was in your shoes (worse 50k medical debt on CC’s) and now has built back up retirement. Although mine was traditional 401k. 1. I do not regret it today. 2. I did not pay the huge penalty for early withdrawal as I was able to classify it as medical hardship. (There’s some strict guidelines that you may or may not qualify for) 3. I was able to build my 401k back up and then some by just putting the money I was throwing into high interest into catchup 401k.
Everyone claiming to take a loan out and or take on yet another CC with 0% interest don’t understand the mental aspect of having this gorilla on your back of debt. Can you go this route and have success sure but if you go the route of retirement funds at your age you can still catch up too. If you were 65 I’d not recommend but you’ve got time to catch up as long as you understand that’s now your priority.
Although I will say you should definitely use your savings and cash on hand to pay off half of this first. I understand not having emergency fund is scary, but your medical emergency that generated this debt IS the emergency an emergency fund needs to be used for. Work to pay that off then build back up your emergency fund.
Im confused by some of this advice. Let’s reframe the question. Let’s say op had $12k available and they were asking if they should put it in a Roth or pay off high interest cc debt. Everyone would say pay off the debt.
Assuming that $12k is all basis and you’ll owe no penalty on the withdrawal, I’d pull the Roth money, aggressively pay down the debt, and then never use credit again until you can confidently pay the balance each month.
Yep, use your 5K savings and pay down that number 2 card, and then $1000 every month, then work on the other one–Interest is killing you