- Credit cards almost always have higher interest rates than 401k plan loans, which makes putting extra payments toward the credit card debt a smarter plan than paying off your 401k plan loan early.
- If you do not pay off your 401k plan loan, the Internal Revenue Service will consider you to have taken an early distribution, which results in extra taxes and a 10 percent penalty. If you can only pay one or the other, you have to weigh these penalties against the late payment fees charged by your credit card.
- Your 401k plan loan does not affect your credit report while your credit card debt does. Paying off your credit cards will improve your credit score, which may help to get a lower interest debt consolidation loan.
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