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Debt Consolidation Facts

1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair Isaac).

2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.

What are the advantages to adding to my 401K?

401K investmentYour parents lived in a day when many companies had safe, secure retirement plans for their employees. They could work through their career with confidence that there would be adequate funds for their retirement. That’s no longer the case. Most of us will change careers several times, and companies many more times. Social Security no longer seems so stable. Our retirement has become a more personal responsibility for most of us. The obvious advantages of 401K accounts naturally apply. We can defer tax on current dollars to a time when our tax rates will likely be lower, and build a significant retirement. There may be matching funds available from your employer, and you don’t want to leave any of those funds unused.

One additional benefit of 401Ks is that they are protected from creditors.

Video: Understanding 401K Plan Benefits

What are the advantages of paying off my credit cards and student loans.

Typically our credit cards are our highest interest debt. We pay much higher interest on those debts than we get as return on our investments. Thus, the first advantage to paying off credit cards is that get a much better return on investment by not paying 10 or 12 % interest than we do by receiving 2 or 3 % from the funds we put in our 401Ks. A second benefit is improving our credit scores. Having funds in a 401K is important, but credit scoring doesn’t care nearly as much about our retirement plans as it does about our present ability to pay. Paying down credit cards and student loans increases your credit score. Having money in 401Ks doesn’t. Student loans are still part of your total debt, and they stay on your credit report until paid, not matter how long that takes. Furthermore freed up credit is available to you if you need it, while 401K funds are available (sometimes, not always) only if you pay taxes, and a 10% penalty if they are taken out before you turn 59 years old.

Student loans don’t usually carry as high an interest rate as credit cards, but it’s still higher than the return most of us get from our 401Ks.

How do I balance these two alternatives?

Video: Should You Use Savings to Pay Off Debt?

There is no one “best” answer. It depends on your situation, including age, income, health, etc. If you have the discipline to first pay off your debt, then concentrate on building your retirement, that is probably the best route. If you are older, though, and your retirement funds are not adequate, you want to build your 401K as quickly as possible. If you do work on getting out of debt first, you should consider a bill consolidation loan. This will normally reduce the interest rate and improve your credit score. For those with student loans, consider (a) Direct Consolidation Loans (repaid to DOE) or (b) FFEL loans (repaid to private lender authorized by DOE). Virtually all types of education loans are eligible for consolidation under these programs. Both programs allow you to take a hodge-podge of different loans, with different maturity date, and combine them into one monthly payment.

Consult a Financial Planning Company for more detailed information on these topics. A few are listed below:

New York
Sterling Bancorp (212) 757-3300

Los Angeles
JPB Investment Company (213) 386-3687

Chicago
Alpha Capital Partners Ltd (312) 322-9800

Houston
Cosco Capital (713) 654-8080

Philadelphia
Wilmington Trust (800) 523-2378