Credit Cards: Never Again

Worst mistake we ever made in our financial lives. And it happened so subtlety, too. $500 for kids dental work here, $1000 for hospital bills, there. Before we new it, we were swimming in about $20,000 worth of credit card debt. All collecting anywhere from 17% to 28.99% APR!

We’ve had a few years of medical-type issues come up that have seriously drained the bank. And because we are always freaking out about not having cash on hand, we differ these to credit cards. It came a point where it was a giant boulder we carried on our backs whenever looking at our finances.

The Brainstorming Session

We were racking our brains trying to figure a solution this soul-crushing debt. I know in comparison to some others, its not the end of the world. But it really was cramping our finances, not mention our spirit.

I started looking for a solution, and came across a 401k loan. This has always been forbidden territory for us, since this is our future on a platter for now. But desperate times. A lot of what I thought I knew about these loans was through hearsay, so I got down to researching it for myself.

The skinny is this: you can pull a certain amount at any time, and use at your discretion (upon approval). You will be expected to pay it back within 5 years or earlier as a payroll deduction (you have some flexibility to choose an amount). 

In my case, there is a $50 processing fee, and a 6.25% interest on the amount you pull (which is all added to your balance). In other words, if I end up paying $21,500 (including the interest), that full amount would all be deposited back to my 401K account.

If you lose your job, that’s when things get hairy. You have 60 days to pay back the full amount, or all kinds of penalties and general chaos ensues. Basically, making the loan a bad choice at that point. 

The Verdict

In my case, weighing everything, the loan was the right choice. My job is very stable (or as confident as I can get), and the company is going nowhere soon. They will allow me to still contribute like normal (not every employer allows for this). And the cons of doing it (post tax deductions, losing vesting in that time period) are outweighed by the crippling interest we are paying on the credit cards now. We reduced our debt monthly expense from $500 (half of which was lost in interest) to $170

I am wary of putting this out in the universe because: a) credit card debt is so embarrassing. I feel like I have failed as a person (I can be VERY dramatic). And b) a 401K loan is really not right for a lot of people. What if you take the loan, and then rack your credit cards right back up? It would be a disaster, so it takes an enormous amount self awareness and control to not repeat the same mistakes.

We have plans to pay back the loan in the next 2 years in full, or sooner. Now that we have significantly lowered our monthly bills, and eliminated our credit card bills, tackling this seems much more doable. 

This was one of those where we were ridiculously nervous to do, but once we did, it felt right for us. We see it as a stepping stone in the right direction, but not the final destination by any means. Its all baby steps with us for right now. 

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