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Subject:  Re: Credit Card debt Date:  11/17/2014  5:30 PM
Author:  joelcorley Number:  308826 of 313010


You wrote, I have a $14,000 balance at 12.5% interest. My questions is should I sell my long term common stocks to payoff the credit card balance? Or, just keep paying a little over the minimum each month? I am aware of the capital gains tax I will have to eat if I sell the stocks. Thoughts.

Normally when someone says they have credit card debt and asks about investing the quick answer is, Heck no... However, its really all about the [real and potential] cost of carrying the debt vs. what you're likely to make. It's also about whether or not you can pay the debt even if the investment goes to $0.

At 12.5% it seems likely that you're losing money holding the stock since the market, even with dividends reinvested, on average won't beat 12.5%. Also that's not a tax-adjusted return, so all things being equal I would probably sell the stock. You should think of your credit card debt as 12.5% margin interest. Would you buy the stock if you had to take out a margin loan at 12.5%? That's kind of what you're doing.

However at 12.5%, it's not entirely a clear-cut call. Punitive rates of 20+% would be much clearer. At 12.5% I'd first be asking myself - how quickly can I pay this off? Can I negotiate for at lower rate? Can I do a balance transfer to save on the interest? Is the stock currently over-valued? How much would selling that stock actually affect my taxes this year? (These are the things that are not equal.) Answering these questions before selling your investment are important because the answers might change your decision.

But even if you can get the interest rate down it's probably a short-term reprieve. You should be planning with the expectation that the rate will rise soon so focus on paying off the balance. If you can't do that, then it might still be better to sell and pay the capital gains taxes.

And in the future it would probably be best if you set up and maintain an efund before doing any more stock purchases. And certainly don't make any new purchases (outside your retirement accounts of course) while you have credit card debt.

- Joel
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