A couple argues about how they should pay off their debts: slow and steady or all at once.

2 minute read

Question: My husband and I weathered the recession better than most of our friends, but it caught up to us last year, when he lost his job and mine was restructured into a lower-paying classification. We’re only now rebounding, and even though my husband has a new job, we had to put almost $10,000 on our credit cards just to make ends meet.

Now we want to pay off the cards. My husband wants me to borrow against my 401(k) savings. I’m allowed to take out half of that, which would just cover the debt. He’s also thinking about borrowing against his life insurance policy (since our children are grown) or taking out a second mortgage (since the housing market in our area is rebounding).

I’m nervous about both options and would prefer something safer, like dipping into our savings and cutting back on our budget. But that won’t pay off the debt quickly, and my husband says the interest rates are eating us alive. Is he right? Am I just being overly cautious?

— Rebecca, Georgia

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Howard Dvorkin CPA answers…

Congratulations, Rebecca, your husband has proposed three of the six worst ways for getting out of debt, according to the Debt Relief Programs for Every Type of Debt section of Debt.com.

Your husband is right about one thing: You’re losing money each month you carry that debt. Essentially, you’re paying your credit card companies money you could spend elsewhere.

There are good reasons for ignoring the allure of a quick solution, however.  Borrowing against your 401(k) seems like a good idea, since you’re paying yourself back and not those credit card companies. But if you don’t pay it all back within a certain time (usually five years), you’ll pay taxes for “early withdrawal.” That means you pay Uncle Sam instead of the credit card companies.

Borrowing against your husband’s life insurance could hurt you if he dies before the loan is paid off – because the loan is still due, with interest. Even though your children are grown, his policy could help you with your mortgage payments so you don’t have to sell your house.

The worst of your husband’s ideas is to take out a second mortgage. Your credit card debt is “unsecured.” This means it would require extraordinary circumstances for you to lose your house to pay off that debt. A second mortgage, however, is a “secured” debt. If you fail to pay that off, the bank can foreclose on your home.

Your plan is much safer, Rebecca. Cutting back on your weekly household budget is all about small savings that add up to big dollars, whether it’s spending smarter at the movies, avoiding bank fees, saving on gasoline, visiting your local library, or timing your purchases better.

I built Debt.com to give you advice on how to save money, and those resources are free, including interactive calculators and in-depth self-help booklets.

One other option is debt consolidation. You can learn more about that on our Credit Card Debt Help page. Bottom line, Rebecca: It’s not easy to get out of debt fast and safely, otherwise nobody would be in debt. Shortcuts can cost you if you’re not careful.

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About the Author

Howard Dvorkin, CPA

Howard Dvorkin, CPA

I’m a certified public accountant who has authored two books on getting out of debt, Credit Hell and Power Up, and I am one of the personal finance experts for Debt.com. I have focused my professional endeavors in the consumer finance, technology, media and real estate industries creating not only Debt.com, but also Financial Apps and Start Fresh Today, among others. My personal finance advice has been included in countless articles, and has appeared in the New York Times, the Washington Post, Forbes and Entrepreneur as well as virtually every national and local newspaper in the country. Everyone should have a reason for living that’s bigger than themselves, and besides my family, mine is this: Teaching Americans how to live happily within their means. To me, money is not the root of all evil. Poor money management is. Money cannot buy happiness, but going into debt always buys misery. That’s why I launched Debt.com. I’m glad you’re here.

Published by Debt.com, LLC