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OK, so you are behind on your credit cards, and the bill collectors are pressuring you. You might be thinking about using your 401K to get them off your back. Think twice before doing that. If you use your 401K, you may never be able to replace it. You might be jeopardizing the quality of your retirement by doing that. Perhaps you should have a session with Carolyn Secor to discuss your options before you do anything.

Some 401K plans allow you to borrow against them. However, are you going to be able to pay back that loan?

Not all 401(k) plans have a loan provision, but if yours does, you might wonder whether you should take advantage of it to pay off your credit card debt. Borrowing from your retirement to pay off consumer debt is a hotly debated topic, so you should hear both sides before you make your decision.

Tied to your company: If you quit or lose your job, you typically have to repay your 401(k) loan in full soon thereafter, regardless of the original loan terms. If you’re unable to pay by the deadline, the loan is treated as an early withdrawal and is taxed at your current income tax level, in addition to a 10% penalty.

Even if you’re not planning on switching employers, you may still want to consider that your perspective or factors outside your control may change over time. A career shift could put you right back where you started, or worse. A 401(k) loan — or any other debt consolidation product — won’t change your spending behaviors. If you feel that paying off your balance may tempt you to max it out again, seek credit counseling.

Alternatives for Paying Your Credit Card Debt

In most cases, a 401(k) loan should be a last resort to pay off your credit card debt. Here are a few less risky options to consider:

Personal loan: Depending on how high your credit card interest rates are, you may be able to find a personal loan with a lower interest rate. But like a 401(k) loan, you have a limited amount of time to pay off your balance. If you think you would be at risk of not being able to make the monthly payments, it may be better to pay more in interest than to have your credit damaged by delinquency.

0% balance transfer card: Credit card issuers offer an introductory 0% APR on balance transfers for a limited time on some of their cards. Some 0% APR periods can be almost two years long, giving you time to take a serious swing at your debt without interest. However, many 0% balance transfer cards require excellent credit and have a balance transfer fee, which is typically 3% of the balance transferred. Before applying for a card, make sure the amount you save in interest is greater than the upfront balance transfer fee.

Home equity line of credit (HELOC): If you’re a homeowner and have equity in your home, you can use a HELOC with your home equity as collateral. You’re likely to get a better rate than with your credit cards because you have collateral, and the interest you pay is tax-deductible. However, you should proceed with extreme caution if you plan on using this option. If you default, you risk losing your home.

Regardless of how you choose to pay off your credit card debt, the most important thing is to take the time to create a plan to pay it off as quickly as possible. Consider how much of your budget you can direct toward debt payoff and when you intend to have it paid off. Then review the pros and cons of each option and find which one fits your plan.

Carolyn Secor P.A. focuses its practice in the areas of Bankruptcy and Foreclosure Defense in Clearwater, Florida. For more information, go to our web site or call 727-335-7151.