ADVERTISEMENT

Will cashing in retirement funds help my credit score?

Paying down debt is good; having no retirement is bad

By

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets.
Ask Sally a question, or read her previous answers in the To Her Credit archive
Question for the CreditCards.com expert

Dear To Her Credit,
I will be divorced within the next two months and starting over again. The housing and rental market I'm in right now is crazy. To me it makes no sense to rent, and I can't really afford to, but I can't afford to buy either.

I recently started a new job with a government agency, so my health care and retirement are set as long as I stay there. If I cash in all my 401(k) plans, annuities, and a portion of my savings, I could pay off my debts and still have enough cash to cover the early withdrawal fees. My question is, will doing so create negative effects when I approach a lender for a mortgage? -- Ruth

Answer for the CreditCards.com expert

Dear Ruth,
Cashing in your savings and retirement accounts and paying off your debts would probably have a positive effect on your credit score. There's a lot more to think about before you make such a drastic move, however.

High credit card balances by themselves do not hurt your credit score. What matters, according to Barry Paperno, consumer operations manager of FICO score developer Fair Isaac, is your credit utilization percentage. That's the percentage of your available credit that you are using. "Strictly talking about the score, if she did that, if her credit was 80 percent to 100 percent utilized, and she paid it down to being 0 percent utilized, it could impact her score."

Let's say you have a low score due to high balances in proportion to your available credit. Paperno estimates that getting rid of your debt could improve your score by upward of 100 points -- a huge difference!

Paperno cautions that if a low score is the result of late payments, paying off debts can only help so much. It won't help the 35 percent of your score that is determined by your payment history. "How you got to where you are has everything to do with how a certain action will change your score," he says. You can turn your credit utilization percentage around overnight by paying off your debts, but re-establishing a good payment history takes time.

Just because cashing in your savings and retirement plans to pay off debts will help your credit score doesn't mean it's a good idea, however. Consider these factors:

  • The credit bureau doesn't look at the money you have in savings, but your potential mortgage lender surely will. Emptying your savings may hurt your chances of getting a loan even though it helps your credit score.
  • You need an emergency fund at all times. Don't use every dime to pay off your debts, leaving you with nothing for emergencies.
  • Try not to touch your retirement funds. Saving for retirement is essential -- try to think of that money as out of sight. The 10 percent penalty on early withdrawals sets you back, too.
  • You can improve your credit utilization percentage in other ways. It's the credit utilization percentage, not the balance on the debts that affects your credit score, so ask your credit card company for a higher limit. For example, if you owe $5,000 on a card that has a $5,000 limit, and you can get the limit raised to $10,000, your utilization of that card drops from 100 percent to only 50 percent. That's a big difference in your favor!

Instead of cashing everything in to pay off your debts, I recommend paying as many debts as you can without touching your retirement plans. Then, make a plan to pay the rest of the debts off as quickly as possible.

Now that you have control over your own financial life, you can start to build a better credit score. Congratulations, and good luck working toward your goal of buying a home!

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.

Published: August 8, 2008


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.




Follow Us


Updated: 12-07-2016


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


ADVERTISEMENT