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Should You Sell Investments to Pay Off Credit Card Debt?
Should you ever sell investments to pay off debt? That's the question I'm facing right now. I have about $40,000 on 0% balance transfer credit cards where the introductory rate will soon expire. While I could transfer some of that debt to my home equity line of credit, I could also sell shares of mutual funds held in taxable accounts to pay off the debt. Selling investments to pay off the debt is tempting, in part, because I would never borrow to invest in the stock market. Yet as a practical matter, that's exactly what I've done. So let's take a look first at the various options to handle this situation. Then we'll list some of the factors to consider when making the decision. And finally, I'll let you know what I'm going to do.
Options When the 0% Introductory Rate on a Credit Card Expires
Here are the options I have to address this credit card debt:
- Leave it on the credit card: When the 0% introductory rate expires, the interest rate will rise to 7.99% fixed. While that's a reasonable rate for a credit card, it is significantly higher than I pay on my home equity line of credit (0.5% less than prime) and is not tax deductible.
- Transfer the debt to my home equity: Right now I have about $30,000 available on my home equity line of credit. That means I could transfer all but about $10,000 of the debt, or perhaps request an increase in my line of credit. I should note here that all of this debt (credit cards and home equity) comes from a major remodel of our kitchen.
- Sell investments: I could sell mutual fund investments held in taxable accounts to pay off the debt. This is a tempting option for me, in part, because it would feel great to get rid of this debt once and for all.
- Transfer the debt to another 0% credit card: On paper this is probably the best option, assuming I can find a 0% balance transfer credit card with a long introductory rate term and a high enough credit limit.
Factors to consider before selling investments to pay off debt
So how do we pick the best option? In making my decision, here are some of the factors I considered:
- Taxes: Selling the investments will generate 15% long term capital gains tax on the gain and 5.75% state tax. Because I've held the investments for a long time and they have appreciated significantly, the tax burden would be hefty. For example, I own Vanguard's Emerging Market Index Fund (VEIEX), which has substantially appreciated since I bought it in late 2002. At the present, more than 75% of my investment represents long term capital gains.
- Interest Rates: Next to taxes, this is the primary consideration. If I can refinance the debt at a low interest rate, say less than 5%, that would be my preference over selling investments. If I don't have access to a low interest rate, however, selling investments to pay the credit card debt becomes much more attractive.
- Convenience: Because I don't have enough available credit on my home equity to handle the debt, I would need to apply for an increase in my credit line to transfer the full balance. While seeking an increase has become much easier thanks to the Internet than it was even a few years ago, it still takes time and energy. If I can do better through a 0% credit card, not only will I pay less in interest, but the whole transaction will take just a few minutes to complete.
- Human Nature: This is one that gets over looked a lot, but the psychology of money is really important. Knowing myself as I do, I know that if I have available credit on my home equity line of credit, I'll likely use it. True, I'll use it to improve my home, which qualifies as "good" debt in my opinion, but I'll still use it. If I don't have the credit available, I'll put off home renovations until I've saved the money. This also keeps me from spending more on a renovation than I should. The point is that some debt actually keeps me from getting into even more debt.
Making the decision
So what have I decided to do? Yesterday, I applied for the Discover More Card (read my Discover More credit card review). The Discover More card offers a 12 month 0% balance transfer option, and I've applied to transfer the entire $40,000 to the card. The online application to about 1 minute to complete and was approved immediately.
I'll find out in three business days what my credit limit is and how much of the $40,000 can be transferred to the Discover More card. If my credit limit is less than $40,000, then I'll have to re-review my options for the remaining balance. But either way I will have transferred most if not all of this debt to a 0% credit card for 12 months and avoided the tax liability that would have been triggered had I sold some of my investments.
Have you ever sold investments to pay debt? If so, how did you make the decision and in hindsight, was it the right one?
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I have never sold investments to pay off debt because (other than a first mortage and employer matched 401k contributions), eliminating unsecured and consumer debt takes precedence over investing. That being said, I am having difficulty determining from your post what investing and debt management strategy you are following with the various transactions you have described. Numbered paragraph 4 is particularly confusing. I’m just not seeing the logic in what you are doing. Do you have an investing and debt management plan other than searching for 0% credit cards? Also, do you have any free cash flow to retire any of this debt? Thanks.
ToughMoneyLove, great questions. First, I do have cash flow to pay down the debt. Right now I’m paying the debt down at a rate of about $1,000 per month. My goal is to keep the debt on 0% offers (if possible) until I can pay it off. I suspect that my $1,000 per month pay down rate will go up in the next year to perhaps as much as $2,000 per month.
I’m with Toughmoneylove, you have to pay off your debt before you even think about investing unless it’s student loan or mortgage debt.
Jim and Toughmoneylove, let’s assume you have $100,000 in mutual funds in taxable accounts, and you want to remodel your kitchen at a cost of $80,000. Would you sell your investments to pay for the remodel, or take out a home equity line of credit? Jim, this may fall into your category of mortgage debt, but with different numbers, this is the situation my wife and I faced last year. We took out a home equity, much of which I have now financed on 0% credit cards.
Toughlove is right, you should never risk your money in investing if you have to pay off debt. You should pay down you debt, and then start investing.
You are fortunate to have the option to utilize your home equity. Many don’t have this option or have exhausted the heloc resource. Plus you would get a tax break as well. I would sleep better at night with paying off the debt completely. The fact that you can put $1k a month towards debt is fantastic and you should feel pumped about that.
Scott, as happy as I am to be putting $1k a month toward my debt, it will still take a long time to pay it down. But the debt was for work on our home, so I shouldn’t expect to pay it off quickly.
As long as you can keep floating the debt at 0%, I say stick with it. I would personally chuck the funds to pay it off, but I’m uncomfortable with any credit card debt. It sounds like you’re ok with it, as long as it makes numbers sense.
At 8%? I’m out. Pay that stuff off ASAP. But at 0%…. no rush to pay it off really.
Well, it’s now February, 2009, and I think we all know what should have been done back in August of 2008. Then the Dow was at 12,000+, and nobody knew what was about to happen. If the writer had taken $40,000 out of his funds back then, he would have paid off his debts, and been done with it. The best strategy is using the market to your advantage and knowing when to use that money while it is there, because as we all know now, it can be evaporate almost overnight in a crash.