If they haven’t hit already, they soon will. What are we talking about? Credit card bills. During the months of November and December credit card activity begins to rise as holiday shopping and entertainment is high on most everyone’s list. From plane tickets to grandmother’s house to bringing the kids home from school to extended shopping excursions, that credit card sure comes in handy. But as the holiday memories begin to fade the realities begin to take over and it’s time to take care of that credit card debt, even though you may not have realized how quickly those credit card balances can rise. But there are some strategies that can not only help you get those balances paid down but increase your monthly cash flow each month at the same time.
Pay Off Credit Card Debt with 401k Loan
One low-cost way to pay off high interest credit card balances is with a 401(k) loan. Most such employee savings programs allow employees to take out a loan secured against the retirement account and it’s not all that difficult to qualify for. Most plans allow employees to borrow up to half their vested balance. Interest rates can vary based upon the type of plan but rates for a 401(k) loan will be lower than interest rates for credit cards. Employees apply directly with the employer, most often with the HR department, complete a bit of paperwork, sign the note and wait for the funds to hit the bank account.
Each pay period, the required monthly payment is deducted from each pay check. While rates are relatively low and there’s not much qualifying involved, funds borrowed from a 401(k) account are no longer actively invested and earning dividends. For example, an employee has a 401(k) vested balance of $50,000 and wants to borrow $10,000 to pay off credit card balances. The $10,000 is removed from the $50,000 amount and delivered to the employee. This leaves a balance of $40,000 in the retirement account.
Use a Debt Consolidation Mortgage to Pay Off Credit Card Debt
Another option to pay off credit card debt is with a debt consolidation loan. With multiple credit accounts with varying interest rates it’s sometimes a bit challenging just keeping up with current credit card rates, monthly payments and getting those pesky credit card balances lower. With a debt consolidation loan, the borrower takes out one larger loan and using the funds to pay off various credit card balances. Debt consolidation loans will typically have lower rates than those reserved for credit cards.
Reduce Your Mortgage Rate While Paying off Credit Card Debt
To get the best rate to pay off credit card debt, we recommend a debt consolidation mortgage, most often referred to as a cash-out refinance. Borrowers can refinance an existing mortgage, obtain a lower rate or better term while simultaneously pulling out equity in the form of cash to pay off credit card balances. With a cash-out refinance, the interest rate is extremely low because the loan is secured by real estate. As a bonus, when current market rates are lower than what the home owner currently has, not only can a debt consolidation mortgage pay off higher interest credit card debt but also lower the overall monthly payments.
A cash out refinance is replacing an existing mortgage with a new one and pulling out more funds to be used for any purpose beyond credit card debt including paying off an automobile loan, installment debt or student loans. A debt consolidation loan can also be in the form of a second mortgage. A second mortgage will have a slightly higher rate compared to a first lien but still well below rates associated with other types of borrowing.
When those credit card bills start rolling in and you’d rather not tap into your checking or savings account, you should consider using the equity in your home to help lower your overall monthly payments and eliminate costly credit card interest.