You are already over the major credit score hurdle of 700 so forget the
credit score. Once you get over 700 it's all the same to a lender.
Ladder the debt as most people here have said (pay off highest interest
first). In an ideal situation you want only mortgage debt so work
towards that. Place $4K in a ROTH IRA for 2005 (spread it out for
dollar cost averaging if you desire) if you would like to save a little
of it for the future.


dvx1212[at]yahoo.com wrote:
- quote -


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a few lines to add context, the previous post is deleted.

dvx1212[at]yahoo.com writes:

- quote -

Don't get rid of the credit card unless you have serious
problems with being incapable of buying only things you
can afford to pay for. Some people do have that problem.
Pay it off completely. Keep using it if you like, but
pay it off completely every single month.

Keeping a rolling balance (on which you are paying interest)
doesn't help your credit scores any more than using it and
paying it off every month. It's about *responsible* use
of credit, not about paying of interest. Most importantly,
don't pay it late.

- quote -

I'd still say no. It's not a great idea even without the
business of being forced to pay it back or be screwed in
the event of job loss. You are borrowing from yourself at
a low rate. But if you are 100% absolutely positively
certain that you (a) won't lose your job and (b) won't
be choosing to leave your job, then maybe the HELOC first
makes sense. I, personally don't believe in (a) for anyone,
ever, and cannot stand the idea that (b) would keep me
in one job.


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dvx1212[at]yahoo.com wrote:

- quote -

Pay the credit card completely off. I think the credit score benefits
of carrying a balance are exagerated. My wife has never carried a
credit card balance in her life and she has an exceptionally good
credit rating.

- quote -

With a 31K HELOC at 7% you are paying $2,170 in interest a year (think
what that money could buy if it wasn't being thrown away on interest!).
Assuming your marginal Fed income tax rate is 25% (Its probably 15% if
you are married with children and making an average income) then your
deduction for this interest expense (assuming your mortgage and
property tax already pushes you well over the standard deduction)
should give you a reduction in taxes of $542.50. So, your net annual
interest cost is $1,628, which works out to 5.2%. Its still worth
paying off!

Andy

"Bucky" <uw_badgers[at]email.com> writes:

- quote -

Not totally. There's still the income tax issue of what
happens if you get terminated with an outstanding balance
on the 401(k) loan and don't have the cash to pay it off
in full at that time.

Depending on confident (or not) you feel in your job,
you might want to consider paying down the 401(k) loan
at least somewhat after paying off the credit card loan.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

- quote -

The interest rate on your 401K loan is irrelevant to your net gains. It
doesn't matter whether it's 1% or 25%. You're paying yourself, so it's
out of the equation.

http://www.mtgprofessor.com/A%20-%20..._401k_loan.htm

The correct comparision to make is the return of the 401K portfolio vs
the HELOC rate. Your HELOC is 7% (~5% after tax adjustment). So if you
expect your 401K portfolio to beat 5-7%, then you should pay off the
401K first. However, your HELOC rate will probably rise, so it wouldn't
be a bad idea to pay that off first.

dvx1212[at]yahoo.com wrote:
- quote -

I think you're letting your credit score cloud your judgement.

How comfortable are you having a chunk of your 401k sitting in cash
earning 4 to 5%? Don't think of the 401k as a debt as much as an asset
allocation. If the market shoots up from here, your opportunity cost is
huge. If the market crashes, you'll can congratulation yourself for
being so clever to be out of the market. You won't know the right
answer except in hindsight 6 months from now.

I would pay off the 401k loan just because I don't have tenure. Your
situation is different, so you'l have to make your own decision.

Bob

Hi,

Thanks for all the great commentary. It has definitely made me think
and rethink some things. To supply some background that may be
relevant, and ask a few further questions:

1) I am a tenured college professor, so my job situation is very
stable. My income is moderate, and unfortunately, that has also been
extremely stable. I would like to move to another university in
the next few years, so any employment changes are largely under my
control (or so I'd hope).

2) The debt I described is indeed a "one shot" situation, and it was a
biggie. Before 2004, I was entirely debt free. Last year, I flirted
with financial disaster by buying way too big a house for me and my
fiancee (with a nice 5/1 zero-down interest only ARM bomb). Yes...
dumb, dumb, very dumb. Things didn't work out with her employment
situation, forcing me to either pay nearly $2000 monthly interest
(read: rent) for a house six times the size needed by me alone, or dump
the house, and quickly. I took a substantial loss at closing, and
covered it with the 401K loan and an unsecured loan from my bank.

Some still question my decision to dump the house at a loss, but in the
face of rising interest rates, scraping by to afford a house I barely
used seemed silly, and I thought it best to take the financial kick to
the stomach and get on with life without the albatross around my neck.
I figure my new monthly mortgage + debt is still far less than my old
mortgage, and unlike a huge house, paper debt is much easier to get rid
of quickly. The inheritance was an unexpected blessing that quickens
it further.

The 8.9% credit card was only opened to transfer the balance of the
unsecured bank loan. I use my bank check card for all purchases, and
have never used the CC account for anything other than the balance
transfer. The 31K HELOC was part of the 80/20 mortgage deal on my
current house. The original plan before the 30K inheritance was to pay
off the unsecured debt first, then work on the HELOC.

My additional questions based on replies:

1) Two respondents said to get rid of the CC completely. I have read
that keeping these accounts open and with small balances is better for
improving credit scores. I was considering keeping $1000 or less in
there ($10,000 is the limit) for awhile and just pay the minimum. As I
noted, the account hasn't been used for purchases at all, so if the
reasoning is to avoid temptation, I have no worries there.

2) Does the relative security of my job change the thoughts on paying
off the 401K? I considered this to be my WORST debt to pay off,
because of its fixed low interest rate (5%). I agree that getting rid
of this puts the money back in equities, but wouldn't the effective
interest GAINED have to offset both the 5% and the interest that still
exists on the HELOC from not using the 12K against it?

3) My logic has always been that one should pay off high interest
rates before low, and unsecured before secured, to maximize credit
rating. How is a 401K loan considered in FICO scores? Isn't it
essentially a loan I'm securing against my own funds? My 401K balance
is around $70K total, but does that matter?

Again, the thoughts are appreciated. Until I clarify things further,
the credit card gets a good chunk taken out of it.

DVX

dvx1212[at]yahoo.com wrote:
- quote -

Good choice! My suggestion is pretty much in line with everyone else's.
First credit card, then 401K, then HELOC.

- quote -

Why would you maintain a 10% balance? This is a little troubling to
hear. You should not be carrying any balance on a credit card, ever!

- quote -


The "cost" of a 401K loan has nothing to do with its interest rate.
Since you're paying the interest to yourself, it cancels itself out of
the equation. The real "cost" of a 401K loan is the expected return
rate of your portfolio. You said that your portfolio has been
performing poorly lately. Then that means that it's a good time to buy
while the stocks are low.

dvx1212[at]yahoo.com writes:

- quote -

Why would you do anything but pay off that credit card
completely and immediately?

That'd leave you with $21,000 cash.

Do you have an emergency cash fund? If not, I'd build that
up next - put, say, $9,000 there. (I'm assuming that $9k
will be enough to cover all of your basic living expenses
for at least several months (based on the size of your
mortgage).

- quote -

Actually, I'd probably lean towards paying off that 401k loan
before the HELOC.

401k loans are generally a crappy idea. If you lose/leave
your job, you need to pay them back immediately else suffer
tax and early-withdrawal penalties. In the meantime, your
401k is partially invested in fixed income (ie. a loan to
yourself) rather than in equities, which is probably where
you want such long-term money to be.

- quote -

If that's the case, then the last thing you want to do is
worry about paying off the mortgages. Well, the HELOC is
looking kind of expensive, but okay, assuming you already
have emergency cash stashed away.
- quote -

More like that debt is burning a hole in your networth.

I can't think of any reason you wouldn't pay off the
credit card immediately and retire the 401k loan immediately
as well. And after that, if you already have emergency cash
stashed away somewhere, pay down as much of the HELOC as
you can. If you don't have the emergency cash, I'd probably
sock that last $9,000 away for that.

Hell, sock away $8,000 of the cash for emergencies and
use a grand for something nice and/or fun. Nothing wrong
with a little reward to yourself for behaving responsibly
with your inheritance.



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Plain Bread alone for e-mail, thanks. The rest gets trashed.
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Are you posting responses that are easy for others to follow?
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dvx1212[at]yahoo.com wrote:
- quote -

Wipe out the CC debt and close the account so you aren't tempted to run
it up again. Then, I agree with BMS, wipe out the 401K loan so you
don't get hit if you decide to leave your job. That leaves 9K. I'd
just throw it at the HELOC. I'm in the same boat as you regarding
interest rate on a HELOC. Keeps inching up. Thankfully, I only have a
few months left on it. It was due to be paid off in 2022, but will be
done in 2005! Rock on. My guess is that variable rate mortgages like
this HELOC will probably only keep going up.

$30,000 is more than enough to payoff both the Credit Card and 401K loans
with money left over..

What's the problem? The more important question is "How did you accumulate
the debt in the first place?" Unless it was a one-off situation you will be
in the same place in a few years with a new 401K loan and more credit card
debt.

Get a copy of "Financial Peace" by Dave Ramsey and read it for additional
details.


<dvx1212[at]yahoo.com> wrote in message
news:1113881621.705998.124080[at]l41g2000cwc.googlegroups.com...
- quote -


======================================= MODERATOR'S COMMENT:
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How secure is your job?

The 401k loan could come due with your leaving and you would be hit with
taxes and penalties, if you could not return the money.

<dvx1212[at]yahoo.com> wrote in message
news:1113881621.705998.124080[at]l41g2000cwc.googlegroups.com...
- quote -


======================================= MODERATOR'S COMMENT:
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Hello,

I've recently inherited around $30,000 from a relative's estate, and
despite the temptations of vacations and cars, I am planning to spend
nearly all of it on debt reduction.

My current debt situation is as follows, with a credit score currently
around 720:

Mortgage #1: $126K at 5.75% 30/Fixed
Mortgage #2: $31K at 7.00% (HELOC)

401K Loan: $12K at 5.00%

Credit Card: $9K at 9.8%

The first step seems obvious: hit the credit card. But should I wipe
it out entirely or maintain a 10% balance, making regular minimum
payments?

Where to throw the remaining money is less obvious to me. My first
hunch is the HELOC, given that the rate has already gone from its 6.5%
at start to 7.0% in three months. But this interest is tax deductible,
so should I adjust the effective interest rate downward? I consider
the 401K loan to be the worst option, given its low interest rate and
poor performance of my portfolio of late (i.e., the money wouldn't
likely be making much more money if I hurried it back into my account).

I'm not sure if it should affect my thinking, but I do not plan to stay
in the current house for more than 2 more years.

Thank you very much for any advice. This money is burning a hole in my
pocket waiting to get put on some of this debt!

DVX