If you're saddled with a lot of high-interest credit card debt, you might be tempted to pay it off quickly by borrowing from your 401(k) or taking out a home-equity loan.
A home-equity loan may be a good idea since you're likely to be charged an interest rate that often is less than half what most credit cards charge. Plus, the interest you pay is deductible. But there is a drawback. When you borrow against your home to pay off your credit card, you trade unsecured debt for debt secured by the roof over your head. If you default on your payments, you may lose your home.
Borrowing from your 401(k) is less advisable. That's because you lose out on two of the biggest advantages to workplace retirement plans: tax-deferred compounding of your money and tax-deductible contributions. Sure, you pay yourself back with interest, but you do so with after-tax dollars.
And, if you quit or lose your job, you'll probably have to repay the entire borrowed amount within three months, if not immediately. If you aren't able to, you'll owe income taxes on the money, plus a 10 percent penalty if you're under 59-1/2.
One other word of caution if you choose either of these routes: Once your credit card debt is paid off, you have to be vigilant about not running your balance up again, because you still will have big loan payments to make.
If you're having trouble paying off your credit card debt, it may be time to consult a debt counseling service for help managing your finances in the future. Two good sources are the Consumer Credit Counseling Service and Myvesta.org.
Next: Managing your debt