# About the Credit Brain

The Brain earned a Degree in Finance from a Top 10 Business School.

The Brain has worked on both Wall Street and Bay Street at bulge bracket investment banks in mergers & acquisitions, equity research, and sales & trading. Subsequently the Brain worked at a private equity fund in New York and a venture capital fund in Seattle investing in asset management and financial software companies.

creditbrain(at)cleanslatecredit(dot)ca

### 5 responses to “About the Credit Brain”

1. R

Creditbrain: Right on! The wisdom in this column ought to be published in the MONEY section of the Sunday paper.

?? ProS and Cons re: maximizing contributions to 401k to cut tax liability (25-35 % rate) vs paying off credit cards in this -/+ market? Retirement in 5 yrs?

2. Dear R,

I certainly appreciate your kind words and am glad to help.

There are a lot of variables in trying to determine a best strategy for your situation. It is important to know the specific tax rate, your expected return on 401(k) investments, the APR on your credit card and outstanding balance and the tax rate for withdrawn assets once retired. That said, we can use some basic assumptions to generalize the situation and you can tinker with the scenarios to best suit your particular circumstances.

I’ve drawn out two scenarios for each of 3 different tax situations (25%, 30% and 35%). The first has you using \$15,500 (the maximum 401(k) contribution amount) to pay off your credit card balance in full and leaving zero balance. The second has you contributing \$15,500 to the 401(k) and paying off just the interest on the credit card.

Other Assumptions:
1) Income = \$50,000
2) APR = 19.999%
3) Retirement Tax Rate = 5% less than the Employed Tax Rate for that scenario (e.g. 25% = 20%; 30% = 25%; 35% = 30%)

My calculation here shows that you will need to generate 25% annual returns on your 401(k) investments in order equal paying off your credit card balance in full.

Obviously there are an infinite number of variables and combinations here to make a generalized statement one way or the other. However, from this example it is clear that it is in your best interest to pay off your credit card balances.

Sincerely,

-cb

3. R

Thanks.

I also note, as you point out elsewhere, one has almost zero control over how a credit card company may change the rates, rules and fees over time.

4. true… and rarely, if ever will these changes favour the consumer

5. R

“you will need to generate 25% annual returns on your 401(k) investments in order equal paying off your credit card balance in full.”

Got my attention.