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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.

Thanks,

Chuck
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cbmc,

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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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.

Given that the OP indicated that they were paying "a little over the minimum payment" it will probably take them several years to pay off the debt. A $300/month payment would pay off a $14k debt in about 5.5 years; $350/month would take about 4.5 years and $400/month would take just over 3.5 years - ASSUMING that the interest rate is fixed at 12.5% Therefore, the average annual return on the stock would actually need to be less than the 12.5% interest rate, even after adjusting for taxes.

However, I would have a big concern about the assumption that interest rates were going to stay the same for 3.5 - 5.5 years, given all of the posturing that's been done by the Fed about rates rising.

Additionally, there is a huge opportunity cost in paying that much each month toward credit card debt. For instance, $400/month is almost enough to fully fund a Roth IRA for someone who is under 50, so the OP will be missing out on being able to put that much away in a tax-free account for at least 3 - 4 years.

I would also refer the OP back to the article referenced in this post http://boards.fool.com/thinking-of-investing-when-in-credit-... where Mark Cuban said, when he was asked what he wishes he'd known about debt in his 20s:

That credit cards are the worst investment that you can make. That the money I save on interest by not having debt is better than any return I could possibly get by investing that money in the stock market. I thought I would be a stock market genius. Until I wasn't.

I should have paid off my cards every 30 days.


AJ
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My questions is should I sell my long term common stocks to payoff the credit card balance?

You could always go with the good old "reframing the question". Would you borrow money at 12.5% to invest in the stock market?

And since most margin rates are a quite a bit less than that, most investors wouldn't either.
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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.

Mathematically, I'd say sell the stocks to pay off the credit cards.

Have you solved the issues that led up to the debt? If you have not, then you may be in a position in the future where you have debt again and not any stock to pay it off. Some people suggest you go through the long process of paying it off so you are more motivated not to go into debt again.

PSU
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I've always been a fan of the Solomon approach--

Can you sell some of the stocks you've had the least gains with and pay down a significant portion of the debt?

Your current situation is something like this:
$14,000 @ 12.5% interest and a $300/mo payment will be gone in 65 months.

If you could net $7,000 from stock sales to use to pay down the debit your situation would be more like this:
$7,000 @ 12.5% interest and a $300/mo payment will be gone in 27 months.
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Since I'm extremely late to the party, I was wondering: what did you do?

- Pam

(For the record, my advice would be: stop using the cards; do a detailed budget to find/plug all the leaks in your spending; track all your spending; and speak to your credit providers about lowering your rates/potential 0% balance transfers, then pay the minimum on the lower rate cards while snowballing the majority of your payment against the highest rate one,)
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