Adam Bergman

Founder, Tax Lawyer, Author

Americans have a credit card problem. According to the Federal Reserve Bank of New York, U.S. credit card balances reached approximately $1.26 trillion in the second quarter of 2026, up $21 billion in just three months. Even more concerning, new credit card delinquencies remain elevated.

But the amount of credit card debt is only part of the problem, the bigger issue is the interest rate. It’s not unusual for someone carrying credit card debt to be paying an annual percentage rate of 20%, 25%, or even higher. At those rates, getting out of debt can become incredibly difficult because so much of every monthly payment goes toward interest rather than principal.

For millions of Americans with money sitting in a 401(k), however, there may be another option that doesn’t get nearly enough attention. It’s called a 401(k) loan, and it can potentially allow you to replace credit card debt charging 25% interest with a loan from your own retirement account charging a much lower rate. Better yet, the interest you pay generally goes back into your own 401(k) account.

I’ve always viewed the 401(k) primarily as one of the best wealth-building tools available to Americans, and I generally don’t like taking money out of retirement accounts early. Retirement money should ideally remain invested and compound for decades. But I also believe there are circumstances where a 401(k) loan can make financial sense, and paying off high-interest credit card debt may be one of them.

Why Credit Card Debt Is So Difficult to Escape

Consider someone with $12,000 of credit card debt at a 25% interest rate. Twenty-five percent of $12,000 is $3,000, which means, roughly speaking, the borrower is facing about $250 of interest in the first month alone before making meaningful progress on the principal. This is why minimum payments can feel like a treadmill.

Assume our borrower pays $300 per month and never charges another dollar to the card. At a 25% interest rate, it would take roughly 87 months, or more than seven years, to eliminate the debt. Total payments would be approximately $26,000, meaning the borrower would pay roughly $14,000 of interest on a $12,000 debt. You borrowed $12,000, paid $300 every single month for more than seven years, and ultimately paid approximately $26,000.

Even increasing the payment to $400 per month doesn’t make the interest disappear. It would still take roughly four years to eliminate the balance, with approximately $7,000 going toward interest. That’s the danger of high-interest consumer debt. Compound interest, which is one of your greatest friends when you’re investing, becomes one of your greatest enemies when you’re borrowing.

The Hidden 401(k) Feature Most Americans Overlook

Most people think of a 401(k) as simply a retirement investment account. You contribute money, your employer may provide a match, the money gets invested, and hopefully it grows over time. But many 401(k) plans contain another extremely valuable feature: the ability to borrow from your account.

The IRS generally allows a participant to borrow up to the lesser of $50,000, or 50% of the participant’s vested 401(k) account balance. There’s a special rule potentially permitting loans up to $10,000 in certain cases even if that exceeds 50% of the vested balance, although plans aren’t required to offer that feature. So, for example, if you have $40,000 vested in your 401(k), you could generally borrow up to $20,000. If you have $80,000, you could generally borrow up to $40,000. If you have $150,000, you’d generally be limited to $50,000.

For most loans, repayment must occur within five years through substantially level payments made at least quarterly. A longer repayment period may be available when the loan is used to purchase a principal residence.

And here’s another important feature: a 401(k) loan can generally be used for any purpose permitted under the plan. You don’t need to prove a medical emergency, you don’t need to be buying a home, and you don’t need to show financial hardship. That means the money can potentially be used to pay off credit cards.

401(k) Loans Are More Common Than You May Think

This isn’t some obscure provision of the tax code that nobody uses. Vanguard reported that in 2024, 80% of its defined contribution plans permitted participant loans, a share that’s likely even higher when measured by participants rather than plans, since larger plans are more likely to offer the feature. Among participants in plans offering loans, approximately 13% had a loan outstanding, with an average loan balance of roughly $11,000.

Separate research published by the Investment Company Institute in 2026 found that 63% of the 401(k) plans in its 2023 dataset allowed loans, covering 77% of participants. Among participants eligible to borrow, 15% had a loan outstanding. In other words, millions of Americans already use this strategy.

The interest rate is generally tied to a reasonable market rate. As of September 2026, the bank prime rate is 7.00%, after rising from 6.75% earlier in the month. There’s no IRS rule requiring a specific formula like prime plus 1%, but Department of Labor guidance requires plan loans to carry a “reasonable rate of interest,” and in practice that’s almost always interpreted as at least the prime rate. That creates a potentially enormous difference compared with a credit card charging 25%.

Turning 25% Debt Into 7% Debt

Let’s go back to our person with $12,000 of credit card debt. Instead of leaving the $12,000 on a card charging 25%, assume the individual has enough money in a 401(k), the plan permits loans, and the applicable loan rate is 7%.

The individual borrows $12,000 from the 401(k) and immediately pays off the credit card. Assuming a five-year amortization, the 401(k) loan payment would be approximately $238 per month, and over five years, total interest would be approximately $2,257. Compare that with financing the same $12,000 at 25% over five years, where the monthly payment would be approximately $352 and total interest would be approximately $9,133. That’s a difference of almost $6,900 in interest expense.

There’s also another major difference. The credit card interest goes to the credit card company, the 401(k) loan interest generally goes back into your own 401(k) account. That’s one reason I think a 401(k) loan deserves serious consideration when the alternative is carrying extremely expensive credit card debt.

What About Larger Credit Card Balances?

The numbers become even more dramatic as the debt increases. Take someone with $20,000 of credit card debt. If that balance were amortized over five years at 25%, the payment would be approximately $587 per month and total interest would exceed $15,200. At 7%, a five-year loan would require a payment of approximately $396 per month and generate approximately $3,761 of interest. That’s a difference of roughly $11,500.

Now consider $30,000. At 25% over five years, the monthly payment would be approximately $881, with total interest of roughly $22,800. At 7%, the monthly payment would fall to approximately $594, and total interest would be approximately $5,642. The difference is more than $17,000. Of course, your actual 401(k) rate may be higher than 7%, if the plan charges the common prime-plus-1% formula, the current rate would be 8%. But even 8% is dramatically lower than a 25% credit card rate.

Why a 401(k) Loan Can Make Sense for Credit Card Debt

Does this mean a 401(k) loan is automatically the right answer for everyone with credit card debt? Not necessarily. But if you’re carrying credit card debt at 20%, 25%, or even higher rates, I believe a 401(k) loan can be one of the smartest tools available to help break that cycle. There are a few considerations to understand, but in my view, they need to be weighed against the very real cost of continuing to carry high-interest credit card debt.

First, money borrowed from your 401(k) will generally no longer be invested in the same assets while the loan is outstanding. That creates a potential opportunity cost if the market performs well. However, eliminating debt that’s costing you 25% a year can provide a powerful and immediate financial benefit. There’s no guarantee your investments will earn 25%, but the credit card company is essentially guaranteed to charge you that rate as long as you carry the balance.

Second, a 401(k) loan needs to be repaid according to the plan’s terms. I actually view that structure as a positive for many borrowers. Instead of making minimum credit card payments that can stretch on for years, you have a defined repayment schedule, generally over five years, and the principal and interest payments go back into your own 401(k) account rather than to a credit card company.

Changing jobs is another issue to understand, since separation from employment can affect how a plan loan is handled. The rules provide certain protections and potential rollover opportunities, but anyone considering a loan should understand their particular plan terms before borrowing.

Finally, the most important part of the strategy is what happens after the credit cards are paid off. The real opportunity is to use the 401(k) loan as a financial reset: pay off the high-interest credit cards, avoid rebuilding those balances, make the required 401(k) loan payments, and redirect the money that was being lost to credit card interest toward rebuilding your financial future.

That’s why I’m generally positive about using a 401(k) loan to eliminate high-interest credit card debt. Yes, retirement assets are valuable and should be protected. But paying 20% or 25% interest for years can also seriously damage your ability to build wealth. If a 401(k) loan allows you to replace 25% credit card debt with a loan closer to 7% or 8%, establish a five-year repayment schedule, and pay the interest back to your own retirement account, I believe that can be a very compelling trade.

You pay off the credit cards and then run the balances right back up. If you borrow $20,000 from your 401(k), pay off $20,000 of credit card debt, and then accumulate another $20,000 of credit card debt, you haven’t solved the problem, you’ve doubled it. A 401(k) loan works best as part of a debt-elimination strategy, not as a way to create more spending capacity.

The Solo 401(k): A Powerful Option for the Self-Employed

There’s another part of this strategy that I think is particularly interesting. If you’re self-employed or own a business with no full-time employees other than a spouse, you may be able to establish a Solo 401(k). This can apply to consultants, independent contractors, freelancers, real estate professionals, doctors, attorneys, online business owners, gig workers, and countless other entrepreneurs. And you don’t necessarily have to quit your day job.

For example, assume Sarah works full-time for a large company and participates in its 401(k). On the side, she earns legitimate self-employment income from a consulting business. The fact that Sarah has a full-time job doesn’t automatically prevent her from establishing a Solo 401(k) for her separate business, assuming she satisfies the applicable eligibility requirements and doesn’t have employees who must be covered. If the Solo 401(k) plan document permits participant loans, Sarah may also have access to the 401(k) loan feature.

Imagine Sarah has built a $60,000 balance in her Solo 401(k) and has accumulated $20,000 of credit card debt at 25%. Subject to the plan and loan rules, she could potentially borrow $20,000 from her Solo 401(k), pay off the credit card debt, and repay the loan to her own plan over five years at the required interest rate.

Or consider a small-business owner with $100,000 in a Solo 401(k) and $35,000 spread across several high-interest credit cards. The 50% rule would potentially give that owner access to as much as $50,000, subject to the other loan limitations. Instead of continuing to send thousands of dollars of high-rate interest to credit card companies every year, the business owner could potentially consolidate the credit card balances with one 401(k) loan and begin paying principal and interest back to their own retirement plan.

For the self-employed, I believe the loan feature is one of the most overlooked benefits of the Solo 401(k). One important distinction: you cannot do this with an IRA, SEP IRA, or SIMPLE IRA. The IRS specifically prohibits loans from IRAs and IRA-based plans, which makes the Solo 401(k) loan feature especially valuable for qualifying self-employed individuals.

Your 401(k) Is Still a Retirement Account

As a tax attorney who has spent much of my career focused on retirement accounts, my default position is simple: I want retirement money to stay in retirement accounts and compound. I don’t view a 401(k) as an ATM. But personal finance is about comparing alternatives.

If your choice is between leaving $20,000 invested in your 401(k) while carrying $20,000 of credit card debt at 25%, or temporarily borrowing from the 401(k) at a much lower interest rate to eliminate the 25% debt, I think the second option deserves serious consideration. You’re effectively replacing extremely expensive debt with substantially cheaper debt. And instead of paying all that interest to a bank or credit card company, the 401(k) loan interest is generally being paid back into your own retirement account. That can be a powerful difference.

The Bottom Line

Credit card debt has become a serious financial problem for millions of Americans. With U.S. credit card balances now exceeding $1.2 trillion and interest rates that can reach 20%, 25%, or more, even relatively modest balances can become incredibly difficult to eliminate.

A 401(k) loan isn’t perfect. It carries risks. It can reduce the amount of retirement money exposed to market gains while the loan is outstanding. It must be properly documented and repaid. And it should never become an excuse to accumulate new credit card debt.

But when used responsibly, I believe it can be one of the most overlooked financial tools available to retirement savers. If you’re paying 25% to a credit card company and have the ability to borrow from your 401(k) at something closer to 7% or 8%, it’s worth doing the math. For the self-employed, the Solo 401(k) can make the strategy even more interesting by combining high retirement contribution opportunities, investment flexibility, and access to the participant loan feature.

The 401(k) was designed to help Americans build wealth for retirement. Sometimes, one of the best ways to protect your future wealth is to stop paying 25% interest today.

This content is for educational purposes only and does not constitute legal, tax, or investment advice. Consult a qualified professional before making any investment decisions.