A reader recently wrote in with what he termed a “complex question” about creative strategies for debt reduction.
My wife and I have FICO scores around 750. We have about $28K of debt on top of $238K in two mortgages (191K & 47K). The first is at 5.75% for another 5 years, while the second is at 11.25%. I just thought about loaning ourselves the $28K from our 401K in order to pay that portion of the debt off (temporarily), closing all open credit lines, then applying for AmEx cards that offer 4.99% lifetime rate on balance transfers in order to balance transfer back the $28K plus some of the second mortgage. Now the questions… How long would the loan be necessary before applying for the cards to ensure maximum credit from AMEX? How much credit might we expect?
First of all, it’s nearly impossible to predict how long it will take to secure new cards and get the balance transfer to come through. In fact, nothing is guaranteed, so there’s a risk of not being able to get enough new credit to pull this off.
Setting those issues aside for the moment, I’m not sure that cancelling the cards is the best course of action. Since he and his wife have high credit scores, it’s possible that they’d be able to get low (or no) interest balance transfers straightaway, without having to play games with their 401(k). This would also circumvent the risk of borrowing from the 401(k) and then being unable to come up with funds to pay it back.
Another strategy would be to apply for one or more 0% balance transfer credit card offers up front. While these offers won’t necessarily provide 0% for life, there are a ton of 12 month offers that can be rolled over to a new offer if/when they expire. These funds could then be used to kill off the high interest credit card debt as well as a portion of the second mortgage. The key here is to avoid piling up more debt while trying to dig themselves out from under. Moreover, you need to be dedicated to paying it off aggressively – you can’t borrow your way out of debt, but you can minimize your costs while paying it off.
Of course, the above depends on their ability to secure the additional low interest credit. But with high credit scores, they might be able to do it. A final tip would be to time the additional credit applications to happen on the same day. The prevailing wisdom is that this will increase their odds of getting the credit that they need, as the left hand (one card issuer) won’t necessarily know what the right hand (another card issuer) is doing.
If you have any thoughts on the above situation, feel free to share them.
This article is part of my Money Q&A Series.