Should I Use Mutual Funds to Pay Down Credit Card Balances? – JJ

“Dear Steve,

41 yrs old (married
42 K in credit card debt @ 9.99%

have 12 K in available mutual fund towards payment of cc balances

have 185 K in 401K

(just reduced my 401K contributions from$500 to $100 per bi-weekly pay period)

can pay approx $500 per month towards credit card balances

I know it is not a good idea to use your 401K toward paying off credit card balances so I want to stay away from that if at all possible. I hate to use my mutual fund money to pay for credit card balances but will probably have no choice due to minimum payments. In my estimation, if I pull about 10-12 K from my mutual fund, and I pay $500 per month towards the cc balances it will still take 6-7 years to pay off, with around 9 K in interest during this time frame.

With the money I am no longer putting into 401K to help reduce this debt (approx 10K per year) and the gains I will be losing from my mutual fund, is this the best approach to attacking this debt and paying it off as quickly as possible or is there another approach that would be better for my overall portfolio in the long run?


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Dear JJ,

If the mutual fund money is not in a 401(k), 403(b) or other defined retirement plan it is not protected from your creditors so it’s a different ballgame.

What makes the most sense would be to continue 401(k) contributions up to the matching limit of your employer so you get the benefit of their free money.

Then you could liquidate the mutual funds down to $2,000 to reduce the credit card balance. That little residual will be your emergency fund if you don’t have one now.

The next part will just be a hard slog of making monthly payments to pay the balance down. Nothing exciting about that but it is what it is.

See also  Women and Financial Insecurity

If your card rates start going up it might make sense at that point to look into a fixed rate consolidation loan from LendingClub.com. The max is $25,000 and depending your your credit right now the rate they can offer you may even be lower than the 10% you’ve got. Hum, it might be worth checking into now, click this LendingClub link for more information.

Damon Day - Pro Debt Coach

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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