[USER]

My family has been using a credit card for all our expenses and paying it off each month to avoid interest.

However, we typically pay off the previous month’s statement balance, so even though we’re not being charged interest, we’re constantly carrying a balance forward from the current month’s spending.

I’d like to break out of this cycle, but I’m struggling to find a way to do so without coming into a lump sum of cash to fully pay off the current balance.

One option I’m considering is an early withdrawal from my 401(k) to pay it off entirely.

This would allow us to start fresh and follow my wife’s plan of paying off the credit card weekly to ensure we never carry a balance again.

Our current debts include our mortgage, student loans, and this credit card (which doesn’t accrue interest because we pay the statement balance each month).

My question is:
Should we try to come up with extra money to reset this ourselves, take out a loan (with interest) to pay it off and then work our way out of that, or take the IRS penalty and taxes on an early 401(k) withdrawal to eliminate the balance now?

If it helps, the amount we’re looking at is 10k with an impact of 30 years until we can withdraw it at age 60.

[Aura]

If you’re not paying interest in the card, then it makes no sense to pay it off.

Basically, you are getting an interest free loan and that is a good thing.

[Ezgi]

Absolutely do not touch your 401k that’s a wild wild thing to do for the problem you have at hand.

I assume you allocate money to savings and investments each month?

Just reduce those and pay off the balance so that you’re only carrying the immediate expense.

I pay off my cards every week and it doesn’t impact my credit score but I know others disagree with that strategy.

[Nikolett]

Confused. No need to touch retirement accounts. That is how CCs work. You pay off the statement balance every month, so you avoid interest.

Or if it makes you feel better, pay the “current balance” every month.

[Johnathan]

Perhaps I’m missing something here, can you please explain why you care about that? Your current practice of paying it off & not paying any interest is perfectly normal & acceptable.

I cannot think of a single reason to make it more complex or to make more frequent payments.

PLEASE do NOT touch your 401k for an idea like this that accomplishes nothing.

[Jonathan]

If no interest you’re fine. If it’s bothering you, cut back spending or increase income are the only fix.

Never borrow from retirement for consumer debt.

[Jule]

If you are under 60 years old, this would be a terrible idea as you’d be penalized for withdrawing from your 401k before the age of 59 1/2. That’s 10% out right from the top.

Then on top of taxes, if the funds are pretax. For what?

To pay for something that’s not collecting interest? Not a good idea.

I’d just pay extra every month over the statement balance until you can catch up to the zeroing the balance.

Also, unless you completely stop using the credit card, you’d always carry a balance forward.

[Jonel]

Reduce your spending to save up and extra month in your checking account. Pay ahead at end of the month estimated monthly amount. Done

[Kris]

Wait…if you pay it off every month I don’t see the issue. Even with carrying the current months purchases. I would NOT use 401(k) for this.

So, pay off the billing statement and stop using the credit card all together and shift how you plan to purchase things (cash, debit card).

Then when the next statement comes pay it off completely.

You said you don’t carry a balance and don’t get charged interest so doing it this way will have zero effect on your cash flow.

However, credit cards add a level of security that your bank debit card does not.

If you don’t want to carry a balance and pay off weekly just start to pay off weekly now but add extra to cover the past charges you haven’t paid.

[Sophie]

I think you may be confused on how credit cards work. What you’re doing is exactly what you should be doing.

I’m missing what the problem is?

[Dave]

If carrying an interest-free balance bothers you so much, use a debit card instead (or make a credit card payment after each week/day/purchase) — taking money out of the market (and possibly incurring a penalty and tax hit in the process) is absolute lunacy.

[Tony]

This doesn’t make any sense. Any time you charge to a credit card, you’re going to have debt, whether you pay it off the monthly billing cycle, pay it off in a week, or pay it off as soon as it posts.

The only way around this is to pay cash, which is inconvenient and unsafe to carry around all the time.

This seems like more of a mindset/peace of mind issue that you need to address with yourself, rather than an issue of creating a new system of payment.

[Mark]

u have 2 loans right now that ur paying interest on (school loans, mortgage).

adding a 3rd loan that u’ll owe interest on doesnt make any sense

[Trevor]

Unless you’re having problems paying the previous months statement balance, there’s really no reason to be heading down the route you propose.

Carrying a balance for 1 month is the way a credit card is supposed to work.

Paying it off sooner doesn’t really benefit you, unless you’re playing games to affect your credit score.

All it does it create extra work for you, and in your case, maybe some extra stress and questionable actions with your 401k.

Just let it ride and pay one payment for the statement balance before the required payment date.

Set this up on auto-pay, and there’s really nothing you need to do each month.

[Megan]

You are following the payment cadence of credit cards. Your due date is ~25 days after the statement close date and the way to maximize your money is to pay statement balance on the due date and let your money chill out until then.

Then bigger question is are you on the CC FLOAT, ie are you charging things before you have the cash on hand to pay it off?

If you are floating you do want to be working towards breaking the float but NOT at the cost of your retirement.

[Heister]

Although your initial sentence says you pay off your cc balance in full each month, by the end it sounds like you entered the credit card hacking game to offset travel costs but are now in over your head with credit card debt.

What’s the amount owed that makes you feel you need to dip into your 401k to pay it off? Is it the 10k?

I get a sense that you aren’t actually fully paying off the previous months statement balance and the debt is snowballing.

[Josh]

From my view. You don’t have a problem, so I can’t understand why you would create a real problem to fix a faux problem.

Am I missing something??

[Kerri]

No, don’t withdraw investments to pay this off. You’re on what’s known as the credit card float.

If you’re not in a budget, start there and trim your costs to reducing your spending over the next few months to pay it down.

That will also help keep you from getting back in the same situation.

YNAB is a fantastic tool for this

[Cecile]

Have you evaluated your budget and trimmed down/eliminated the non essential spend? That should be your first step.

Borrowing or withdrawing from your 401K isn’t going to be the solution if you can’t manage your budget.

Do a no spend challenge for a month and apply the extra towards your balance.

10K is not a sizable amount, with discipline, you can pay that off in no time.

[John]

Nah, no harm in paying the statement balance every month. If it bothers you, pay a chunk over each month and take it down slowly.

I would pull from 401k.

[Karen]

I’m totally confused. Your statement balance is the amount that you charged for the month and then it is due the following month.

If you are paying off this balance every month, you are not carrying a balance.

If you paid what you owed from last month on the current statement, and never use the card again you would not have any balance.

So, unless I’m missing something here, there’s no need to start taking money from

anywhere to pay your credit card bill. You are using the credit card exactly how it is intended.

[Author]

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