1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair
Isaac).
2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% -
30%!
3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.
What are the
advantages to adding to my 401K?
Your
parents lived in a day when many companies had safe, secure
retirement plans for their employees. They could work through
their career with confidence that there would be adequate funds
for their retirement. That’s no longer the case. Most of us will
change careers several times, and companies many more times.
Social Security no longer seems so stable. Our retirement has
become a more personal responsibility for most of us. The
obvious
advantages of 401K accounts naturally apply. We can defer tax on current dollars
to a time when our tax rates will likely be lower, and build a
significant retirement. There may be matching funds available
from your employer, and you don’t want to leave any of those
funds unused.
One additional
benefit of 401Ks is that they are protected from creditors.
Video: Understanding 401K Plan Benefits
What are the advantages of paying off my credit cards
and student loans.
Typically our credit cards are our highest interest debt. We
pay much higher interest on those debts than we get as return on
our investments. Thus, the first advantage to paying off credit
cards is that get a much better return on investment by not
paying 10 or 12 % interest than we do by receiving 2 or 3 % from
the funds we put in our 401Ks. A second benefit is improving our
credit scores. Having funds in a 401K is important, but credit
scoring doesn’t care nearly as much about our retirement plans
as it does about our present ability to pay. Paying down credit
cards and student loans increases your credit score. Having
money in 401Ks doesn’t. Student loans are still part of your
total debt, and they stay on your credit report until paid, not
matter how long that takes. Furthermore freed up credit is
available to you if you need it, while
401K funds are available (sometimes, not always) only if you pay taxes,
and a 10% penalty if they are taken out before you turn 59½
years old.
Student loans don’t usually carry as high an interest rate as
credit cards, but it’s still higher than the return most of us
get from our 401Ks.
How do I balance these two alternatives?
Video: Should You Use Savings to Pay Off
Debt?
There is no one “best” answer. It depends on your situation,
including age, income, health, etc. If you have the discipline
to first pay off your debt, then concentrate on building your
retirement, that is probably the best route. If you are older,
though, and your retirement funds are not adequate, you want to
build your 401K as quickly as possible. If you do work on
getting out of debt first, you should consider a bill
consolidation loan. This will normally reduce the interest rate
and improve your credit score. For those with student loans,
consider (a)
Direct Consolidation Loans (repaid to DOE) or (b) FFEL
loans (repaid to private lender authorized by DOE).
Virtually all types of education loans are eligible for
consolidation under these programs. Both programs allow you to
take a hodge-podge of different loans, with different maturity
date, and combine them into one monthly payment.
Consult a Financial Planning Company for more detailed
information on these topics. A few are listed below:
Your
parents lived in a day when many companies had safe, secure
retirement plans for their employees. They could work through
their career with confidence that there would be adequate funds
for their retirement. That’s no longer the case. Most of us will
change careers several times, and companies many more times.
Social Security no longer seems so stable. Our retirement has
become a more personal responsibility for most of us. The
obvious
