Should I Sell Stock To Pay Off Credit Card Debt ? No, Not At All. Never ever sell your investments to pay down debt. It might look like an easy solution, but it has serious implication in-terms of personal finance. So avoid selling stocks to pay down not only credit card debt but any type of debt you may have incurred.
Many credit cards impose a 20%, 25%, or even higher interest rate. Due to a late payment, you may have a penalty APR as high as 29.99 percent.
Even if you didn’t make any payments — or went to court — that $6,354 would balloon to an eye-popping $77,341 at a 25 percent APR over ten years.
A household’s financial plan might be wiped out by rapid debt growth.
A new study from the University of Missouri discovered that the stress of carrying credit card debt into adulthood is associated with harmful health, including joint discomfort or stiffness that hinders daily tasks. According to the study, persons who have a lot of debt may not be able to get health-protective resources because they lack the money.
In light of the global financial crisis, these findings are particularly timely.
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Cost of Borrowing vs. Return On Investing
Comparing the price of your debt with the interest savings you can expect from selling an investment might help you determine whether or not selling assets to pay off your debt is a good idea.
A credit card that costs 18 percent interest, is an excellent example of a situation in which interest is a factor. To put it another way, if a specific investment of yours returns an average of 6% per year, you may be better off selling that commodity and using the money to pay down your debt.
As a result, your portfolio likely contains a variety of assets with varying rates of return. You should choose the most likely ones to get you the least money back. To put it another way, if you have a portfolio of stocks and bonds that have delivered you an average yearly return of 12 percent over the past few years, it makes sense to hold onto the stocks and cash out the bonds.
And that leads to another essential point: Avoid incurring losses on investments if you’re planning on selling them to pay off debt. You’re not seeking to reduce your taxes by writing off investment losses. Instead, you’re scrounging for every penny you can get your hands on to pay off your debt. To avoid losing money, it is better to hold on to the investment rather than sell it immediately. You may then sell it and use the money to pay off your debts.
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Is It Worth Selling Stock to Pay Off Debt ?
If you’re paying a 20% interest rate on your credit card debt, you’ll need to make at least 20% on your assets to cover that interest expense if you’re looking at this financially.
You can quantify the optimal path to pursue when making that decision. The greater the interest rate on a debt, the more difficult it is for your investment returns to outweigh the interest expense.
A broad rule like this should not be relied upon for major financial decisions; instead, each individual’s unique situation should be considered.
Think about what you’re giving up by withdrawing money from your investment portfolio to pay down debt. When deciding whether to pay off your debt or invest your savings, think about what your money will be used for.
If you put money into it, it’ll grow. If you keep your money invested and the interest rate on your debt is below 4%, you might move away with the difference.” Alternatively, you can put the money in an account and utilize it later to pay off the obligation. You’ll be better off keeping your money invested in this situation.”
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Why Should You Pay Down Your Debt First Before Investing?
Paying down debt instead of investing has several advantages. Because of the high-interest rate on some of your debt, you may be able to save money. This is especially true if you owe money on your credit cards. Investopedia’s credit card database recently monitored an average interest rate of 19.62 percent on credit cards. It’s hard to find investments that yield as much as this one.
Getting rid of debt is also good for your credit score, which might be critical if you need to borrow money for a home or automobile. For those with poor credit, interest rates might be much higher if they can acquire a loan. When it comes to insurance premiums, renting a home, and even getting a job, your credit score directly impacts many elements of your life.
Numerous elements go into determining a credit score. The credit usage ratio (the amount of credit you now utilize relative to the total available credit) makes for a large percentage of your FICO score, which is the most generally used credit score.
Someone with maxed-out credit cards, for example, is likely to have a lower score than those who have wiped off or at least reduced the balance on all of their credit cards to a more sensible number. Even if you have a small debt, it might be wise.
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Does Investing in Stock Affect Credit ?
Several different types of investing accounts can be used to make stock purchases. When it comes to saving money, 401(k), IRA, and Health Savings Accounts (HSA) are good options. Before beginning any work, take the time to familiarize yourself with the rules, restrictions, and possible tax ramifications. To buy and sell a stock, you can open brokerage accounts.
There isn’t a credit check to open one of these accounts, and the accounts aren’t recorded to the national consumer credit reporting agencies, TransUnion and Equifax. Your credit report will have no record of your closed accounts. Even though your credit score is exclusively based on information in your credit report, these changes will not affect it.
A possible exception to this rule is if you apply for a margin account, a form of brokerage account that provides you with a line of credit to use when purchasing shares. When you apply for a job, certain firms may run a credit check, which could lower your credit scores slightly if a hard inquiry is made. Even if an effect is felt, it is usually short-lived.
Margin accounts allow you to borrow money by using your account’s assets as security. There is no negative impact on your credit history if you take out a margin loan and use it to make stock purchases.
Keep enough cash on hand to cover any margin obligations. As a result, it is possible to lose more money than you put into your account. A margin account loan that is not repaid may be reported to credit bureaus, hurting your credit rating.
However, most companies keep tabs on how much money you owe and how much money you have in your account. If your portfolio’s value drops and you receive a margin call, you may be required to make further deposits or sell investments to reduce or eliminate the risk of an unpaid debt.
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Can I Use Capital Gains To Pay Off Debt ?
The short answer is NO.
There is always a tax involved on your investment returns. That is called as capital gains tax. Capital gains tax can go upto 37% , if you are selling your investment within a year. However if you have long term investment then the taxation might be less.
The moment any amount is deposited to your bank account that is considered as gain and it is taxable. So there is no much benefit to use your capital gain for paying off debt.
However one important point to keep in mind – if you are selling a property or real estate which is your primary residence then you might not get any taxation on the capital gain. You can use it for any type of debt clearance.
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Final Words !
Selling your investments to pay off debt is a situation in which you should proceed with extreme caution. However, suppose you must use your assets to pay off a high-interest obligation (such as an unpaid credit card balance). In that case, there are other options to examine before resorting to this strategy.