One of the questions I get asked all the time is should I use my retirement savings to pay off my credit cards?
I like to share my answers with you here because I’m on a mission to populate the internet with knowledge and truths. Radical, isn’t it? But I think it’s important to know what happens when we default, because that’s what keeps everyone up at night. The what ifs game. And it’s not even the actual truth about the what ifs….it’s the unknown. It’s easy to lie awake at night and be worried about making a credit card payment or how to get out from under the debt and think that the next thing is getting arrested or thrown out on the streets.
Let me explain. Credit card debt is unsecured debt. This means that if you have a credit card and default on it, no one can take your house or get you evicted from your home. They can’t come take your free and clear car.
If you default on a credit card, meaning you can’t make the payments any more, the credit card company will close your account after 90 days or 3 missed payments, and then they will offer you a settlement for a fraction of the total. The good thing is, the balance stops accruing interest, and if the interest is killing you, this could be a good thing. You save up the cash, make them an offer, and start on a new chapter of your life. You can often make payments on the reduced settlement amount as well. It all depends on the company.
You generally have 2-4 years on a card before a bank will move for any court action, unless the balance is large or tied to a business. But for personal accounts under 20k, you’ve got time. Even if something happened really fast, and there was a judgment, you can still negotiate the judgments for a reduced percentage.
Certain companies won’t give you a card again unless you pay the balance in full, but other ones will after you make a year of on time payments for the settlement amount.
And you can always get other cards to help you rebuild your score, especially after you make payments on the defaulted accounts.
What does it do your score? Well, in most cases I see clients that go through credit repair and start to establish positive pay history be back where they were in 6-18 months. Why? Because having maxed cards and a lot of credit card debt really hurts your score, so defaulting on them and paying them off is about the same thing.
I don’t write about this stuff because I want you all to go out and default on your cards. But, I do want you to know your options, because I know what it’s like to have the unknown keep you up at night. It’s a kind of hell I wouldn’t wish on anyone.
In fact, if you ever find yourself in a financial pickle and you have to decide whether to pay your mortgage/rent or your credit cards, let the credit cards fall first. At the same time, try to get your mortgage refinanced before your score gets hit, but always pay your mortgage (secured debt) over unsecured debt. Yes, it’s a pain to travel and to not have any backup if you don’t have a credit card, but dealing with evictions or having to move is emotionally exhausting and expensive as well.
If you’ve been wondering if a consolidation loan from someone like Upstart or Sofi makes sense, I’ve got three clients that are in the process of deciding on which company and getting approved for them right now. When I get to the bottom of it, I’ve got a post brewing about which one is the best.
And just one last tip. If you are maxed on your cards and making minimum payments and you get in a situation where you can pay them all off in one fell swoop (inheritance, consolidation loan, bonus at work, profitable launch, lottery), keep in mind that if you pay them all off at once, you’re likely to get your credit limits slashed. Why? Because good credit is all about looking like you’re responsible with credit over time. You’re better off paying them off over 3-6 months chunks, even if you’ve got the money in the bank and you’re itching to go. You don’t want to pay any more interest than you have to, but keep in mind that by having higher limits showing available with low usage, you’re likely to get a lower rate on big ticket items like mortgages and cars, so it pays to go slow.
Even when you do get them paid off, use a little credit every month. 10% or less is ideal. You want to show positive pay history to keep your score up.
I’ve been deep down the rabbit hole working out the tech bugs for our membership course that’s going to allow you to work with us for less than the cost of custom repair, so keep an eye out in the next few weeks for our call for beta testers for a special price.