Should You Sell Investments to Pay Off Credit Card Debt?

Should you ever sell investments to pay off debt? That’s the question I faced some years ago. I had about $40,000 on 0% balance transfer credit cards where the introductory rate would soon expire. While I could have transferred some of that debt to my home equity line of credit, I could also have sold shares of mutual funds held in taxable accounts to pay off the debt.

Selling investments to pay off the debt was tempting, in part because I would never borrow to invest in the stock market. Yet, as a practical matter, that’s exactly what I had done. So let’s take a look first at the various options to handle this situation. Then, we’ll list some of the factors to consider when deciding. And finally, I’ll let you know what I did.

Options When the 0% Introductory Rate on a Credit Card Expires

Here are the options I have to address this credit card debt:

Leave it on the credit card: When the 0% introductory rate expires, the interest rate will rise to whatever regular APR applies to the card. In most cases, that’s a double-digit interest rate. It may even be higher than 20%!
Transfer the debt to my home equity: At the time, I had about $30,000 available on my home equity line of credit. That means I could have transferred all but about $10,000 of the debt or perhaps requested an increase in my line of credit. I should note that all of this debt (credit cards and home equity) came from a major kitchen remodel.
Sell investments: I could sell mutual fund investments held in taxable accounts to pay off the debt. This is a tempting option for me, in part, because it would feel great to get rid of this debt once and for all.
Transfer the debt to another 0% credit card: On paper this is the best option, assuming I can find a 0% balance transfer credit card with a long introductory rate term and a high enough credit limit.

Factors to consider before selling investments to pay off debt

How do we pick the best option? In making my decision, here are some of the factors I considered:

Taxes: Selling the investments will generate 15% long-term capital gains tax on the gain and 5.75% state tax. Because I’ve held the investments for a long time and they have appreciated significantly, the tax burden would be hefty. For example, at the time I owned Vanguard’s Emerging Market Index Fund (VEIEX), which has been substantially appreciated since I bought it in late 2002. At that time, more than 75% of my investment represented long-term capital gains.
Interest Rates: Next to taxes, this is the primary consideration. If I can refinance the debt at a low interest rate, say less than 5%, that would be my preference over selling investments. If I don’t have access to a low interest rate, however, selling investments to pay the credit card debt becomes much more attractive.
Convenience: Because I didn’t have enough available credit on my home equity to handle the debt, I would need to apply for an increase in my credit line to transfer the full balance. While seeking an increase is a simple process, it still takes time and energy. If I can do better through a 0% credit card, not only will I pay less in interest, but the whole transaction will take just a few minutes to complete.
Human Nature: This is one that gets overlooked a lot, but the psychology of money is really important. Knowing myself as I do, I knew that if I have available credit on my home equity line of credit, I’ll likely use it. True, I would have used it to improve my home, which qualifies as “good” debt, in my opinion, but I’ll still use it. If I don’t have the credit available, I’ll put off home renovations until I’ve saved the money. This also keeps me from spending more on a renovation than I should. The point is that some debt actually kept me from getting into even more debt.

Making the decision

So what did I decide to do? I applied for the Citi^® Double Cash Card. The Citi^® Double Cash Card offers a 18 months 0% balance transfer option, and I applied to transfer the entire $40,000 to the card. The online application took about 1 minute to complete and was approved immediately.

Have you ever sold investments to pay debt? If so, how did you make the decision, and in hindsight, was it the right one?