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I've been seriously considering taking out a secured loan from the bank that issues my car loan. I can do this after my car is paid for, which is one more payment. Yahoo! The secured loan would be for $5000 at a 9.9% rate. That would leave me with about $2K in CC debt to pay down, but I liked the idea of not having to deal with interest rate fluctuations and crap from CC companies over the term of that loan. The 9.9% from the bank is fixed.

Now...I got a statement from Paine Webber the other day re: my mutual fund. My parents put $2500 in an account for me there 2-3 years ago and it's now worth $3700. I'm thrilled about the idea of having my own little investment since I don't have the cash to start investing on my own now. But, the part of me that really, really, really wants to leave this CC debt behind was thinking that if I took the money from this investment, I could pay off more than half of my debt in one shot. Pretty appealing, especially since I don't foresee any cash windfall anytime soon (no bonus or raise until the end of the year, and my tax return should be minimal). I believe I could aggressively pay off the remaining debt in a year or so, maybe less, since I intend to drive my paid-for car until I need to push it to work. Also note that I am "doing the right thing" as far as not racking up any additional CC debt; I just use AmEx now and pay it in full monthly.

Any thoughts? I'm 28, so I could begin investing right after my CCs are paid and still have some time for the money to grow. I also contribute to my company 401(k), so I've got retirement savings covered for now. I'm only doing 5%, but I plan to increase that as debt is paid.

Thanks for any advice.
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This is kind of a tough one. Normally I would say leave the money alone since it is making a reasonable return for you, and let it continue compounding, maybe even add some on your own money to it. But, as a I am also on the last legs of paying off my debt monster finally and once an for all, I can sympathize. How would your parents feel about you cashing it out? Ok, or would the be insulted/angry about it? They started the fun as an investment in your future so maybe they should have some input? This thought is un-Foolish, I know, but there is something to be said for how it would make you feel. Is it worth loosing the already good start on investments if it saves you piece of mind and gets you closer to a major life goal that you have set for yourself?

The reason I think it might not be a necessarily bad idea is that it appears you have broken the cycle of living in debt. You are also paying it off once and for all and shouldn't fall into the trap again. You will be able to dramatically increase your 401(k) and begin investing in stocks (if you choose to go that route) considerably quicker if you eliminate your debt now. I would consider it because I know how it would feel to virtually eliminate it all at once.

You would probably loose some money on the transaction in the long run, but that depends heavily on how much you start socking into investments when the debt is gone and how your returns do over the next 40 years. It's all semantics really. Just do what makes you feel best because the numbers will work themselves out. Just my opinion :-).

Good luck.

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The idea of moving your credit card debt over to a fixed loan with car loan people is definitely a good idea, for two reasons. First, it's good because the 9.9% interest is almost certainly going to be lower than your CC APR. Secondly though, it reflects more favorably on your credit rating to have debt in installment loan form instead of in unsecured, revolving debt form. Unsecured "bankcard" debt (aka credit card debt) is considered riskier b/c there is no collateral in case you decide to default. All other things being equal, your credit bureau score is likely to be a bit better if you have a $2,000 car loan than if you have a $2,000 Visa balance. (More on this in my post to last week's dueling fools board if you find this sort of info at all useful.)

As for pulling money out of mutual funds to pay CC debt, in *this* case, wouldn't it be good to leave the money in the mutual fund? Assuming that you do transfer your CC debt to the 9.9% loan from your bank, and assuming that your mutual fund is growing at least at market average, your choice is between making payments on a 9.9% loan or keeping the money in investments with an 11%+ rate of return. (And even higher than 11% these days.)

Plus, it is always nice to know you are building a nest egg...

Best wishes,

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Hi january00,

It certainly would feel good to go ahead and take that mutual fund money and pay off your remaining debt.

But consider this: Once you sell the mutual fund shares, you have to pay capital gains on them. In effect, you end up putting yourself in debt to the IRS.

I bet you'll feel even better if you keep the mutual fund, and pay down your remaining credit card debt from income. The sense of accomplishment will be greater at the end of it, and $2000 shouldn't take that long to pay off.

I think you'll be better off if you pay the minimum on the secured loan and put all of your resources into paying off the remaining $2000.... while still watching the money in the mutual fund grow and multiply (at least we hope that's what it'll do).

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