FINANCIALconnection
Cash for credit
Also:
■ 401(k)
■ Canceling credit
By Suze Orman
Our home has an appraised value of $470,000,
and we owe $147,000 on the mortgage. We
are over our heads in credit-card debt. We
are trying to refinance, but the bank is giving
us a hard time. How can we get cash to pay
all our credit-card debt?
Walter R.
Silver Spring, MD
cipal so you will have a lower balance to pay off in a
few years. Those $400 extra principal payments over
the next three or so years will reduce your mortgage
balance by $15,000. That will mean you need to pull
out less from your 401(k) to pay off the balance.
That leaves more for your retirement, and will lessen
the tax bill you will face in 2013 when you make the
big withdrawal.
Ask Suze
Orman
E-mail your personal-
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Suze Orman’s TV
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can be contacted at
www.suzeorman.com.
d r t it
MARC ROYCE
IF YOU ARE OVER your heads with credit-card
debt, that’s a Las Vegas Strip’s worth of flashing red
lights for lenders these days. In this environment,
the lender is most worried about your future
ability to pay. The fact that you have this debt and
you now want to eat into your home equity to
“solve” your problem gives them pause. Too much
credit-card debt is a sign you can’t afford your current lifestyle. How do you raise cash? You lower your
expenses. If you have all that home equity, you sell
the home, pay off your bills and move into a new
home—and a new lifestyle—that does not require
getting in over your heads with credit-card debt.
I have an $80,000 mortgage left on a 10-year
no-interest loan that I intend to pay off when
I can access my 401(k) without penalty. I turn
59½ in December 2013. I have been paying
down my principal $400 per month. Since it is
a zero-interest loan, would I be better served
depositing the $400 in an interest-bearing
account, then applying that toward the payment in 2013?
Glen A.
Jacksonville, FL
IF YOU INTEND to stay in your home through
retirement, I think it’s smart to pay off your mortgage ahead of retirement. But I want to make sure
you carefully consider your plan. First, please tell me
that your 401(k) is invested in a stable value fund or
money market, because if you intend to use the
money for such a short-term goal, you’d better be
sure it will be there when you want it. And while you
know to wait until you can withdraw the money
without the 10 percent early-withdrawal penalty,
please factor in that withdrawals from your 401(k)
will be taxed at your ordinary income tax rate.
Depending on your other income, you might have
to withdraw more than $100,000 to net the $80,000
or so you need. Don’t base it on your current tax
rate, but on the rate you might pay when your
reported income jumps by $80,000. Just something
to keep in mind.
With bank accounts paying only 1 percent or so,
saving the $400 a month isn’t going to make you
much. I’d rather see you keep paying down the prin-
One of our credit-card companies sent us a
letter and said that they would be canceling
our credit card at the end of this year due to
non-usage. We have not used it for the last
two or three years, but kept it just in case. We
are now worried about this having an effect
on our credit score.
Jill P.
Seattle, WA
CREDIT;CARD ISSUERS have indeed stepped up
their “use it or lose it” initiative in the past few
years. First off, have you contacted the credit-card
company and asked what you need to do to keep
the card? Often all they want is to see you make
some charges once in a while. It may be as simple
as agreeing to have one recurring expense paid on
that card—maybe your cable bill or some other
ongoing subscription.
If they do indeed cancel the card, the impact to
your FICO credit score depends on how big the credit
line on the card was. As I have explained before, one
of the biggest factors in determining FICO credit
scores is overall debt-to-credit ratio—that is, the sum
of all your credit-card balances divided by the sum of
all your available credit. So let’s say your overall balances are $2,500 and right now, with this card, your
overall credit limit is $15,000. That means your ratio
is about 17 percent. Now let’s say the card in question
has a $5,000 credit limit. Once it is canceled your ratio
would jump to 25 percent because your total available
credit would fall from $15,000 to $10,000. As your
ratio rises, your credit score will indeed be affected.
How much depends on multiple variables and
your current score.
My advice: See if the credit-card company will
cancel the cancellation if you start using the card
once or twice a month. If they won’t, consider opening a new credit-card account; often the best deals
are through a credit union. You can search for top
card deals at
www.creditcardconnection.org. C
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NOVEMBER 2010 ;e Costco Connection 19
