Overwhelmed by Credit Card Debt? Tap into retirement savings or home equity.

If you recall, Joe SuperSaver warned you that the remedies to your debt problem get more painful as you work down the list. This is certainly true when it comes to sacrificing your future for your present problems, or hocking your home to the hilt to deal with unsecured debt.

In a few cases, however, this approach may work. If the credit card interest rates are high, and if you can pay off all your credit card debt with a large cash infusion from your retirement or your home, you’ll make a clean break and will stop funneling your hard earned cash into card payments. If you can promise yourself that you will try hard never to let this happen again, and if you start to rebuild your retirement account or make extra mortgage payments with some of the money saved, you can restore your savings over time.

If you’re considering using money from your 401k (or equivalent) retirement account, check with your plan administrator to see what options are available to you. It’s much better to borrow from the account and pay the loan back from paycheck withdrawals. Often, you’ll be able to borrow up to 50% of your account value, and pay it back with low interest over several years. The downside is that you lose the investment potential of the money while it’s out of the account, and you now have a monthly obligation that reduces your take home pay. Also be sure that you plan on staying at your job until the loan is paid back, because an unpaid 401k loan is due and payable when you terminate employment, and is considered a withdrawal if you can’t pay back the balance right away.

The 401k withdrawal is less desirable than a loan, because it comes with early withdrawal penalties (10%) and taxes (dependent on your marginal tax bracket). The employer will usually withhold 20% of the amount withdrawn, and you’ll have to pay the rest when you file your next tax return. Employers may also restrict withdrawals to emergencies, such as a pending foreclosure or bankruptcy, or for a medical reason. However, there is no monthly payment, so the withdrawal does not burden you with added debt.

If you’re considering tapping into home equity, you’ll need that good credit again to make it happen. Reputable banks are not going to lend you all of your remaining home equity – a total of 90% loan-to-value for the sum of your existing mortgage and the equity loan or line is probably the most you can get. Whatever financing you arrange will add a new monthly payment, so you need to be sure that you will save enough on the credit card payments to make this worthwhile.

If your problem is so bad that you are likely to start charging up the cards again, you’ll regret the decision to tap into savings because you’ll have nothing to show for all your efforts and you’ll still be deeply in debt. And if you are nearing retirement age, you won’t have much time to rebuild for the future.

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