Sunday, December 17, 2017

Should You Jeopardize Your Nest Egg to Repay Your Credit Card Debt?

The total outstanding value of US credit card debt is now over $1.02 trillion. This places a significant burden on total US household debt, and amounts to a debt burden of around $7,000 per household. It is encouraging to note that less than 50% of US households have any credit card debt whatsoever.

If we exclude these households with no debt, then the average credit card debt for indebted people amounts to $15,624. While this figure is substantial, it is also much lower than it has been in 5 years. Consider the following average credit card debt balances among debt carrying households since 2013:

  • 2013 – $16,319
  • 2014 – $15,876
  • 2015 – $15,692
  • 2016 – $15,810
  • 2017 – $15,654

These numbers paint a skewed picture of the actual debt burden. Over the years, the average household debt may have declined among debt carrying households, but the overall level of debt has increased substantially. Simply put, more people are sharing the debt burden than ever before. 

This is largely due to an era of ultralow interest rates which made borrowing cost effective for so many US households. The percentage of US households carrying credit card debt has increased from 38.1% in 2013 to 45.6% in 2017, and this trend shows no indication of slowing down. 

With unemployment hovering around 4.1%, and the US economy booming, spending is on the up and up. Easy access to credit has facilitated a credit boom, even after banks and financial institutions clamped down post global crisis.

If You Are in Debt, How Should You Pay for It?

Naturally, there are concerns about how best to manage debt. Several options are available to reduce the debt burden, notably switching (transferring) debt from high interest credit cards to lower interest credit cards. 

This method is heavily promoted in the media, and by credit card companies, but it comes with a caveat: There are costs involved in transferring balances from one account to another. All the pros and cons should be weighed up against one another.

Other options include using a savings account such as a 401(k) for retirement to pay down credit cards. This is generally not advisable, since it will cause disruption to your retirement nest egg, and there are various penalties and tax consequences to contend with. 

An important consideration when it comes to credit card debt is that it is unsecured debt. This means that it can generally get discharged in a bankruptcy filing, and assets cannot be attached to its repayment.

Perhaps the most pressing question for the 50+ generation is why the debt still exists? Debt elimination, debt management, and debt consolidation options are readily available from multiple bank and non-bank entities. Sometimes, it may be a good idea to discuss the situation with a financial planner.

What’s the Worst That Can Happen with Unsecured Debt?

If there is absolutely no other way to repay credit card debt, and you risk ruining your credit profile, it is possible to use a 401(k) loan to repay credit card debt. These loans are much more cost-effective than credit cards, and the interest that you pay goes directly to your own account. 

On the plus side, there is no negative effect on your credit score. Experts do not recommend taking money from retirement to pay down credit card debts, since money in hand is more valuable than access to credit that can easily get taken away from you.

Other ways to consolidate your credit card debt include home equity loans, unsecured personal loans, and balance transfer cards. These methods should be assessed on their merits, given that there are pros and cons associated with each of them. 

It is never advisable to transfer debt from an unsecured line of credit to a secured line of credit such as a mortgage loan or a home equity loan.

You stand to risk a lot more than your credit score if you cannot make the repayment. The balance transfer card option is a viable solution provided your credit score is high. Be advised that the interest-free component will cease after 12-18 months. 

For unpaid credit card debts, you could face a loss of credit lines and a reduced credit score. You will however get to keep your existing assets, pending further litigation.

No comments:

Post a Comment

Join 1000's of People Following 50 Plus Finance
Real Time Web Analytics