Debt question.?

Question

I am 21 years old and I invest in mutual funds and some stocks. I have about $2500 invested in my personal portfolio and I also invest 8-10% of my income to my 401K. I am going to school full-time during the morning and afternoon and then I work full-time at night. I do not make a very high income due to flexability etc. I hate my job but I'm just using it while I get through college. I have about $600 in debt on credit cards and I am slowly trying to pay them off. I do about $50 every pay check and I am trying to be as frugal as possible. I am wondering if anyone has any suggestions on whether I should sell off some of my personal portfolio to pay off my credit cards or should I leave it and continue to earn dividends and interest. My original plan was to keep it in for long term gains. Any advice would be appriciated!

Answer 1

Congratulations on your financial situation. Most students your age would be up their eyeballs in CC debt and student loans.

What is your CC interest rate? 18% per year? If so, then paying that balance off is exactly equal to an 18% guaranteed return on your any payments toward the $600 debt. Your other investments probably don't return anything near 18% -- I would bet they are probably 1/2 of that rate.

Can you take a 2nd job and use that income to pay off your CC debt in 1 or 2 months? That way you don't have to sell off your portfolio.

Can you increase your $50 per paycheck to payoff the CC loan any sooner? Even $10 or $25 will help a lot.

Worst case, you can also take some of your personal portfolio and pay off $300 or more of you CC debt to get it down to a lower level. But you might have to pay taxes on any short or long term gains. I would suggest selling any short term losers and short term gainers first, then sell your long-term gains -- to minimize your tax burden. See a tax consultant or CPA for further advice.

BTW, your $600 in CC debt is modest in size, and quite manageable. Keep up the good work.

Answer 2

I believe you should consider your $2500 as an investment you are guarding with your life. Saving or investing money can be very difficult - so I would let that money grow and use it only for emergencies.

Your debt is not all bad news. A strong credit history can provide substantial savings in the form of lower interest rates. Starting good credit early should do wonders for your credit score.

If your credit card has a high interest rate, consider taking out a loan to pay off the credit card.

Services such as www.prosper.com might help. You will receive a very low rate on your loan and your payments are reported to credit agencies, allowing you to build good credit history without the higher fees charged by the credit cards.

Good luck!

Answer 3

sit down and figure how much interest you're making on the mutual funds and stocks and weigh that against the interest you are paying on your credit card during the entire time you will be paying off that credit card debt and figure it out for yourself if you are losing or winning. It's difficult to do figuring for another person when not all the information is provided. I mean like the old rule of thumb was to not invest in anything until you had "extra" money to do so (not that you had to scrimp and save to do so). And you didn't say how long before you graduate college, nor say how you are paying for your college, nor said that you would probably rack up more bills after graduation maybe for traveling to find the job you want, clothes and transportation. So more than likely that credit card balance will grow for a time in your future. You also didn't say if you have health insurance. In my opinion I'd say you put the cart before the horse and maybe you did that because of peer pressure. You also didn't tell us which stocks you have and if they are making money for you.

Answer 4

It really depends on the interest rate on the credit card. Many credit cards have extremely high interest rates, over 20% in some cases. It would be better to pay these high interest cards off, even if you need to dip into your investments, then pay yourself back and put the payback into your portfolio. Carrying a balance on a credit card except in an extreme emergency is generally a really bad idea. You dig yourself a hole a little bit at a time, and someday realize you are still paying for a dinner you ate 40 years ago.

Answer 5

As long as the market is doing what it is doing I would continue to invest for the long term.
This is not the best deal, but if you really want to get rid of the credit card debt you could borrow against the 401K account, pay off the credit cards and then pay off the loan with interest to you own 401k account. At least you would be keeping all of the interest that way.

Answer 6

Compare the interest rate on your credit card and the anual percentage your investments are generating. If you gain more from investments, keep your money in the investments. But if your credit card rate is higher, get the card paid off ASAP even if it comes out of the investments. Think of it this way, if a credit card costs you 20% APR then paying it off is like getting a 20% return on a stock even after taxes!

Answer 7

If you plan on getting rid of your credit cards permanently AND you will not take a penalty on your mutual funds by withdrawing AND your return is less than your interest rate I would say take the withdraw, pay the cards and put the $50 back into investing instead of paying. You need to look at the overall picture. Carrying a small credit card debt will increase your borrowing power when you get out of school and go to purchase a house.

Answer 8

Hi there sometimes we have to take a step backward to gain a great run forward. If I was in your shoes I would pay that card off in a hurry. That way you don't have to pay the bloody interest on that card.

I'm 41 and have learnt the hard way. I do have a Credit card but only use it for online transactions.

Pay it off and get the attitude that if you don't have the money for what ever you want save for it or go with out.

I hope this helps you abit.

Best of luck!!

Answer 9

DO NOT use any of your investment for a $600 debt. If it was several thousand dollars it would be ok, but don't do it for this amount. How often do you get paid? $50 a paycheck is great if you are paid once a week, just ok if you are paid every other week, and not good at all if paid once a month. Totally bite the bullet for a couple of months and try to go a little higher with the payment. You could be out of debt in a couple months if you would just eat peanut butter and jellys for a couple meals a day. It is worth it to be debt free.

Seriously, don't touch the investments.

Answer 10

Assuming that your $600 on credit is costing more interest than the interest you're making on your mutual fund, you should pay off the credit card asap. Then put that card away, and pay only cash from now on. You can use your debit card for credit in most instances.