August 07, 2013
As the economy slowly recovers, Americans are struggling to get out of credit card debt they amassed during tougher financial days.
The good news: the majority of people are paying their credit card bills on time. Recent data from the American Bankers Association shows that less than 2.5 percent of credit card accounts were 30 days late in the first quarter of 2013.
The bad news: they're amassing more debt. Outstanding credit card balances in the U.S. rose to $856 billion according to a study by the Federal Reserve Board.
Out of desperation to stay current, or to rid themselves of their debt, people are looking at their retirement accounts as a cash source. But Suze Orman says that's the biggest mistake you could make.
"The last thing I want you to do is to take money from a retirement account such as a 401(k) and pay off credit card debt. That is simply wrong," exclaimed Orman on Saturday's episode of "The Suze Orman Show" to a caller from Ohio who has more than $50,000 in credit card debt.
Orman says even bankruptcy would be a better course than raiding your 401(k). "Remember, any money you have in a retirement account is protected against bankruptcy so if you really can't afford to pay these payments, bankruptcy is more of an option," said Orman.
Other factors to consider before withdrawing funds from a retirement account include the amount of fees and taxes that may be imposed. Orman pointed out to her caller that the $57,000 in his retirement account could be reduced by more than 35 percent after federal and state income taxes are deducted.
"Then you won't be able to pay off your credit card debt," explained Orman.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.