Boots25
Contributor

I have a significant amount of credit card debt that I've been trying to pay off ($26k). I also invested $8k in some stocks about 6 years ago that are now worth $13K.  I like having the option of selling the stocks should I need them but I'm now thinking about selling them to tackle the credit card debt. Would this be a wise choice? I feel like if I can take a big chunk out of it, it'll be easier to pay off. I rarely use the credit cards anymore and pay $500-$1000 more than the minimum payments but it feels like I am hardly making a dent. Also the one with the largest balance ($20k) has the lowest APR. The other card with a $6k balance has an APR 3% higher than the other one. I know in the long run paying off the one with a high APR will save me money but I also feel like having such a high balance on the other one is killing me with interest rate each month. Which one should I pay off first?

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3 REPLIES

Excellent question @Boots25. I commend your willingness to tackle on this debt! The decision would be up to you, I say that only because USAA does not have credit experts that can advise on what would be better to pay off first and how. From what I have read in your post, it does appear you have a good idea on how to begin getting this tackled. We do however have via USAA.com our 'debt manager tool' that you can access under advice>planners and calculators> savings and debt. I hope this is helpful, have a great day. -Emily. 

IT IS A SMART CHOICE TO SELL YOUR STOCK TO PAY OFF CREDIT CARD DEBT. START WITH THE HIGHER INTEREST RATE ACCOUNT. The total interest expense on the larger account *seems* worse (and I'm sure feels worse), but it's almost always financially smarter to pay off high interest rate debt first.

 

Your investment portfolio, assuming $8,000 invested and worth $13,000 six years later, provided you an average pre-tax return of 8.43%. I'm assuming this is a taxable account (since you didn't mention any penalties associated with withdrawing), so your after-tax return (assuming 35% combined Federal and State income taxes) is 5.48%. Recall you're making credit card payments with "after-tax" dollars (employer withholds your fed/state taxes from paycheck, I assume) so you need to compare it to your after-tax investment returns.

 

Feel free keeping your credit card debt IF your credit card interest rate is less than 5.48%; the returns from your investment portfolio, in this fairy tale scenario, exceed the cost of debt.

 

HOWEVER, since you live in the real world a 5.47% credit card interest rate is highly unlikely. Therefore, pay off those credit cards and start with the highest interest rate account.

 

You don't need any "investment tools" from anyone to understand what is the financially smart decision (my response is an utter failure if you feel the need to seek additional advice, which is on me, not you).

 

Best,

John

If you invested $8000 and it's now worth $[removed sensitive data], you're going to pay capital gains taxes on the $5000 in profit.  If your capital gains tax rate is 20%, you'll owe $1000 in taxes right off the bat.  Think about whether that's your best move.