ADVERTISEMENT

Avoid using your IRA to pay card debt

Wiping out your life's savings will create its own problems

By  |  Published: January 7, 2017

Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

Ask a question.

'Credit Smart' archive

Question

Dear Credit Smart,
I have $16,000 in credit card debt that I could pay off with my hard-hit individual retirement account. I owed for serious medical debt. I will have no savings after this. I am working part time. I currently receive Social Security widower’s benefits of $1,375/month. My job brings in $14,000/year. I have a house payment of $1,050/month, and a second mortgage of $20,000 at $196/month. I was thinking I could start rebuilding savings and sleep better if that credit card debt is gone. I have a partner who helps with food and utilities. I am 65 and plan to receive about $500 more per month when I shift to my own Social Security at 66. Although I have some limitations, I feel fit and have an excellent attitude toward solving this. – Calvin

Answer

Dear Calvin,
I applaud your excellent attitude. From your question it appears that you plan to continue working part time, which I would recommend for as long as you are able. Your mortgage payments alone take most of your Social Security earnings; even without credit card debt and help from a partner with food and utilities you are looking at a fairly tight budget. The additional $500 will certainly help out, but you are correct in knowing that you are going to need to rebuild your savings. Life has a way of happening and too often those events come with a high price tag.

It is certainly true that looming credit card debt can cause stress that manifests itself in a variety of ways, and losing sleep is one of those ways. However, you should know that wiping out your entire savings could also cause you to lose sleep. I do understand that your IRA is not earning anywhere near the interest you are paying out on your credit cards, which is probably one reason you are considering this move.

If we assume you are paying 15 percent interest on your card debt, then your minimum payment is $360. That extra $500 per month is more than enough to cover a minimum payment, with a little left over for savings. However, paying only the minimum will stretch your payments out far into the future – in your case, more than 27 years, when you will be more than 92 years old. If you can transfer the balance to a lower-rate card, you could cut the time considerably.

I want you to know that there are other options available for addressing this debt. Two of those options are debt settlement and bankruptcy. Both of these options will have a negative effect on your credit score, in addition to other consequences that you might not want to deal with. From your question it seems that you have a sincere desire to pay your debt off in full and move forward.

A third option that would take care of that concern would be for you to seek the advice of a certified, nonprofit credit counselor like those associated with my organization, the National Foundation for Credit Counseling. A counselor will review your entire financial situation and help you find the best solution. This initial consultation is always free. The counselors know the importance of emergency savings and will work with you to help rebuild if you decide to use some or all of your savings to pay off your debt.

Your counselor may also suggest a debt management plan, which would get your debt paid off in five years or less but at a fixed, reduced interest rate. Your credit cards would be closed to further charges on a DMP, which could cause a temporary drop in your credit score. However, 100 percent of your debt will be paid off on this type of plan. Making consistent on-time payments through a DMP will help correct this dip in score in time. If you choose to enroll in a DMP, you will likely be subject to a setup and monthly fee. However, these fees are generally minimal and less than what you will save in interest depending on your current interest rates. This solution would preserve the savings you have, even though you are not earning much on those IRA funds.

Remember to always use your credit smarts!

See related: Minimum payment calculator

Meet CreditCards.com's reader Q&A experts

Does a personal finance problem have you worried? Monday through Saturday, CreditCards.com's Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.

ADVERTISEMENT
ADVERTISEMENT

Join the discussion
We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.




Updated: 08-18-2017

ADVERTISEMENT


Weekly newsletter
Get the latest news, advice, articles and tips delivered to your inbox. It's FREE.


ADVERTISEMENT