Should I Use My 401(k) to Pay Off Credit Card Debt?

For most working Americans, there are a couple of ways to accumulate wealth as we approach our retirement age. Owning a home is one way. Winning the lottery is another. Between those extremes is building a retirement account, such as a 401(k).

While the money in a 401(k) is meant for our golden years, both strategically and legally, there are times it could be necessary to use it for other purposes: a medical or financial emergency, for example, or simply to rein in out-of-control personal debt.

Debt, especially unsecured credit card debt, can be as detrimental to your financial health as a retirement plan is beneficial. So, it is worth considering 401(k) loans in order to eliminate a growing pile of debt that limits your financial freedom and flexibility. It is especially worth thinking about if you have no other options for paying off the debt.

It is not a simple decision. There are important factors to consider.

401(k) Loans: At a Glance

A 401(k) account is an employer sponsored, tax-deferred retirement savings plan. It is the most common of the work-place retirement accounts available to American and is governed by its own set of rules and limitations.

With a 401(k), you contribute to your account with each paycheck, usually deducted from your total amount paid. Many, but not all, companies add to your contribution. The money is then invested in the stock market and allowed to grow, with market gains and compounding interest increasing the amount of money available upon your retirement.

Many 401(k) accounts allow you to borrow money from the account. Essentially, you are borrowing from yourself, but there are special rules governing 401(k) loans. Typically, you can take out 50% of your vested balance or up to $50,000, whichever is less. There are several types of 401(k) loans available.

401(k) Personal Loans

Borrowing from your own 401(k) account means not dealing with banks or other lenders, which use credit scores to determine eligibility. If you are borrowing to pay off credit card debt, it is likely that your credit score has been affected in a negative way. You still have to pay back the loan with interest, but that money is being added to your 401(k).

401(k) Personal loans can be used for several reasons:

• Paying off student loans is one compelling reason. Whatever hit your 401(k) takes in the short term may be offset by the money saved from the interest accruing on the student loans. Many people make monthly payments on student loans for years while interest causes their owed amount to rise.
• Buying a car often means making a down payment and then taking on a four-, five- or six-year loan term, all the while accruing hundreds or even thousands of dollars in interest. A 401(k) personal loan allows you to avoid the credit check, make the down payment and avoid the high interest from the bank or car company’s finance department.
• Putting a down payment on a house can be a challenge. Often, the larger the down payment, the better the interest rate on your mortgage. Borrowing from your retirement funds can help you to get the best rate available and lower your monthly mortgage payment. Of course, that may be offset by the monthly payment you’ll be making on your personal loan.
• A loan to pay off credit card debt is similar. Interest on credit cards is often extremely high, high enough that borrowers can find themselves underwater. Removing that debt and the drain on your resources may be worth tapping into your retirement funds. If you reach a point where declaring bankruptcy is an option, a 401(k) loan may allow you to avoid the negative aspects of that.

401(k) Hardship Loans

For many people, long-term plans often go awry. A major life event such as a medical emergency or funeral costs or a natural disaster, forces you to grasp at whatever financial assistance you can.

A hardship loan is similar to a personal loan but with concessions for whatever emergency you’re facing. You pay the money back into your account.

With some plans, you may qualify for a hardship withdrawal. In that case, the amount will be counted as income for tax purposes, plus you pay a 10% early withdrawal fee. On the other hand, you don’t have to pay that money back unless you choose to.

Credit card debt can fall under the umbrella of a hardship loan, particularly if the high debt and interest are creating a pressing danger to your financial stability.

Be sure to check with your employer’s HR department or with the administrator of your plan for details on the restrictions involved in hardship loans.

Benefits of Taking Out a 401(k) Loan for Credit Card Debt

Remember that your 401(k) account is subject to the whims of the financial markets. If you withdrew funds in the summer of 2024, for example, you missed out on some growth potential during that period. Thus, borrowing from your own account was more expensive than other options.

But if you borrowed 401(k) funds before the stock market plunge in the first quarter of 2025, you were able to pay off high-interest debt with money you might have lost during a downturn. That’s a win/win for you, especially if the market stabilizes and grows as you pay back your loan.

Market fluctuations are difficult to predict, so it’s important to weigh the constant benefits against the normal drawbacks. Here is a look at the good and bad sides of 401(k) loans.

No Credit Check

No one checks your credit report when you borrow from your own 401(k) account. With a 401(k) loan, you’re pre-approved.

On the other hand, a bank or other lender would check your credit score, which may well be lower than you’d like because of the high credit card debt you’re carrying.

Low Interest Rates—That Go Back to You

Interest rates rise and fall, but one constant is that the rates on a 401(k) loan are lower than the rates on other commercial loans. That means your monthly loan payment will be lower than it would be with a loan from a bank or a credit union.

On top of that, the interest you’re paying every month is going back into your retirement account. It probably won’t make up for the potential market growth that you are giving up, but that interest can provide some positive growth.

Drawbacks of Taking Out a 401(k) Loan for Credit Card Debt

There are certainly drawbacks to consider before taking out a 401(k) loan to pay off credit card debt. Some advisors will flat out discourage this option. Ideally, you can follow their advice, but we’re not talking about ideal situations. We’re talking about real life and real decision-making.

Disrupts Retirement Goals & Financial Future

As obvious as this appears – of course, you have a 401(k) to prepare for your golden years – it is worth reinforcing that your financial plan is based on saving and growing money for the day you retire. Borrowing your own money from your retirement plan might be necessary, but it still means taking money away from yourself.

That money also represents part of your investment capital, so you give up stock market gains and the compound interest that keeps adding value to your portfolio. If it takes five years to repay the loan, that’s five years of lost gains.

Job Change or Loss Will Affect 401(k) Loan

If you leave your current job and the employer with which you have your 401(k), you may have to repay your 401(k) loan immediately and in full. If you go on to a better job with a higher salary, that may be manageable. If not, it could be a significant problem.

If you can’t pay, you could be considered in default of the loan. You’d owe the full amount, taxes on the amount and a 10% penalty on the outstanding balance — unless you’re over age 59 1/2, when rules change for 401(k) withdrawals.

If you can’t repay the loan, the outstanding balance may be deducted from your retirement account. And that deduction will count as income subject to federal income tax. Dealing with all of this would be unpleasant at any time, but especially during a time when you are dealing with a career change or unemployment.

Tax Penalties for Nonpayment

If you default on a 401(k) loan, or if the debt is forgiven by the lender, the amount in question is considered taxable income by the IRS. So, you would be paying taxes on the balance even if you don’t have any of that money on hand.

The tax implications for 401(k) withdrawals or loans change when you reach the age of 59 1/2 (your 59^th birthday plus six months). Before that age, you must pay an early withdrawal penalty of 10%. If you withdraw or borrow $20,000, you will owe an extra $2,000 on top of any interest accrued.

Alternatives to 401(k) Loans

The advantages to borrowing from your 401(k) – no credit check, no bank to deal with – are as obvious as the disadvantages, which include lost retirement gains and difficulty if you lose or leave your job.

There are alternatives without those considerations, although each has its own set of concerns. Before making any decision, you might consider speaking to a nonprofit credit counselor who can offer perspective at no cost to you.

Balance Transfer Credit Card

If you have high amounts of credit card debt, that often means you have multiple monthly payments to manage, even as you aren’t making a dent in the overall balance.

A balance transfer credit card offers a way to pay off your other cards and consolidate your debt to a single card. That means one monthly payment, usually at no- or low-interest for an initial period of time.

Qualifying for a balance transfer card usually requires a good credit score, 690 or higher. If you are slow to pay the card back, interest rates on the balance can rise. On the plus side, a balance transfer card does not affect your retirement savings or planning.

Debt Settlement

If you are behind on your credit card payments, you may find yourself hearing from debt settlement companies. These are for-profit businesses that settle your debt for less than the full amount. However, tread carefully with this choice. The late fees, interest charges and cost for this service may put you in a deeper hole than you’ve already dug.

You might be better off contacting your original credit card issuer and asking if they will settle the debt. For the companies, it may be easier and more cost-effective to agree to a debt settlement plan.

Again, a nonprofit credit counselor can walk you through the options and help you decide on the best one for you.

Debt Consolidation Loan

Borrowing from yourself has advantages, but borrowing from someone else could be a better option.

A debt consolidation loan has some of the same advantages offered by a balance transfer card. You move all your credit card debt to one place, meaning you make one monthly payment at a lower interest rate. The savings can be significant.

You will need to qualify, which means a good credit score helps. If your score is in the high 600s or the 700s, you will likely qualify for a loan.

Home Equity Loan

If you are in your own home, you may have built up some equity with your monthly mortgage payments. If you borrow against that equity, either with a straight loan or a Home Equity Line of Credit (HELOC), you can erase the high-interest credit card debt and make one payment at a more reasonable interest rate.