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Should You Delay Your Debt Payoff?

Dear Dayana,I have $24,000 in credit card debt, all at 0% to 2% until the balances are paid off. I have decided that since I have such a low rate, I will max out my 401(k) and start paying down my 5-year, interest-only mortgage. Is this "Foolish" (in a good way, of course)?

For background, my Debt Demons started in the mid-1990s, when my salary was cut but I (stupidly) did not change my spending habits. I now carry three active cards, but avoid charging like Dracula avoids garlic. I also have set my repayment amounts for the three cards at a fixed amount (about the minimum due) so I can pay them off more quickly.

I am able to put 19% in my 401(k) (my employer matches the first 5%), with the flexibility of reducing my contributions if my creditors raise their rates. Since I am 51 (and a little behind the savings curve), I am trying to save as much as possible. -- Thanks for any advice, FDWD (Formerly Dumb With Debt)

Dear FDWD,

Great question -- and one a lot of people have as they juggle financial obligations. The answer is tricky: It's "yes" and "no."

Sure, you can invest while in debt (long pause) ... when it's the right kind of debt. "OK" debt has an interest rate that's less than 10%; one that has some tax advantage; and is for a purchase whose value increases over time. Think mortgage debt, or even student loans. (More details are here: " Got Debt? Go Ahead, Invest.")

Credit-card debt is another story. I usually encourage people to pay down credit-card debt before investing -- or at least at the same time they invest, and only then just to get into the habit of savings.

However (you knew that was coming, right?), since your cards are at such a low interest rate, the math supports investing in your 401(k) -- at least up to your employer's matching-funds limit. (Eventually, you'll want to look into the catch-up provisions the IRS allows for those over the age of 50. In 2006, for example, you're eligible to contribute an additional $5,000 to your 401(k) and $1,000 to an IRA. But first, let's get you on solid financial footing.)

As with any great deal with credit cards, you must keep your eye on the dealer (your lender). It'd be a big financial shocker -- a financial devastation, really -- if that 0% APR suddenly shot up to 24%. There are many reasons your lender might do that (outlined here), all unrelated to its business with you.

At the same time, you need to come up with a plan to pay off that debt, particularly when those low APR offers begin to run dry. Borrowing from your 401(k) or even home equity to pay it off down the road would kill the benefit of this short-term financial fix. (I emphasize "short-term" because the robbing-Peter-to-pay-Paul game is not the way to amass a nest egg.)

Finally, $24 grand in credit card debt is nothing to sneeze at. At 0%, the debt seems painless. But at higher interest rates, it's anything but. It sounds like you have begun to examine the road that got you there. Don't underestimate the demons that drove you into debt in the first place. Getting into the habit of living within your means and paying off your balance every month is difficult. It's often the wretched pain of paying 14%, 16%, even 24% interest over time, and scraping to pay it down, that helps people learn to do so.

Our Credit Center is chockfull of strategies to pay off debt. And there's always a shoulder to lean on and a word of encouragement and advice from the amazing folks on the Consumer Credit/Credit Cards discussion board.

Sound like a plan? Keep an eye on your APRs, begin investing, come up with a plan to pay off the credit card debt, and retrace the road that got you here. Then, once you've wiped the slate clean, you'll be set to start paying yourself -- not The Man -- a sweet rate of return.

Got a money question?Dayana Yochimcannot answer all questions emailed to her, but the even smarter Fools on thediscussion boardsalmost always do.


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