Additional Ways to Eliminate Credit Card Debt
There are several ways to eliminate credit card debt. The best approach for you will depend on factors such as the amount you owe, your credit score, and your credit history. The information below can potentially assist you in paying off credit card debt. However, these approaches are generally not recommended and may not be the best long-term financial solution.
Withdrawing From Retirement Savings and Investments
When you withdraw from retirement savings, you not only deplete the funds you take out, but you also forfeit the potential growth and returns you would have earned, setting you back in your retirement savings goals.
Additionally, retirement accounts like a 401(k) and traditional IRA impose early withdrawal penalties. If you access these funds before reaching the age of 59 ½, you’ll incur a 10% penalty. Furthermore, the withdrawn amount is considered taxable income, meaning you will also owe taxes on the funds you take out.
Taking Out a Loan Against Your Home
Credit card debt is unsecured, meaning there’s no collateral tied to it. In contrast, options like a home equity loan or cash-out refinance use your home as collateral, making the debt secured. By borrowing against your home equity to pay off credit card debt, you turn unsecured debt into secured debt. If you default on the new loan, you risk losing your home.
In general, it’s important to protect your home’s equity. Borrowing against it is highly risky and usually not worth the added danger of paying off credit cards. Even if you default on a credit card and it goes into collections, your home can’t be taken. Creditors would have to sue you in civil court to collect. However, once you take out an equity loan, your home is at risk of foreclosure if you fall behind on payments.
Taking a Loan Against a Life Insurance Policy
If you have a life insurance policy with cash value, you may be able to borrow against it. However, just because it’s an option doesn’t mean it’s a good idea. Taking money out creates a new loan, along with a whole new set of issues.
If you fail to repay the loan or pass away before it’s settled, the insurer will deduct the owed amount plus interest from your death benefit. This means your family will receive less financial support after you’re gone. The life insurance is meant to provide a safety net for your loved ones in the event of your passing, and you want to avoid actions that could weaken that support.
Taking a Loan From Family and Friends
Unless you’re okay with the potential fallout of damaging relationships or making family events uncomfortable, it’s generally best to steer clear of borrowing money from people you know. Around one-third of Americans understand this and would rather go into debt than borrow from family or friends.
While borrowing from someone you know may be more affordable than taking out a formal loan, it comes with the risk of straining personal relationships.