Credit card rates are notoriously high, and it’s good to pay off debt as quickly as you can. However, one investor has a hot stock that is up by 124% over the past four months. The investor isn’t sure if it makes sense to sell the stock and end up with a short-term capital gain to pay off the credit card debt, or if it makes more sense to hold the stock.
That’s why the investor asked Reddit for advice. Several Redditors jumped in the comments and shared their thoughts.
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It’s Hard To Outperform A Credit Card’s APR
One of the top comments came from a Redditor who said that credit card rates can range from 20% to 30%. It’s hard to outperform a credit card’s APR in the stock market, and while the original poster has a hot stock, it’s possible that the same stock goes through a correction.
When investors borrow against their portfolios using margin, they only borrow at rates that are much lower than their credit card debt. Borrowing against your portfolio is only suitable if you are a high-risk investor, but even then, the rates come nowhere close to credit card interest rates.
“The interest rate is likely over 20%, maybe even 30%,” one commenter said. “It is always best to pay off high-interest debt, even if it’s a tax hit to sell the stock. The stock would have to have returns higher than the interest rate to make keeping the stock worth it. Given the S&P averages 10%, keeping in stocks isn’t a good idea. Sounds like you got lucky on the stocks.”
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Wait Three Months To Catch Up
The original poster’s business is growing, and they mentioned that it may take two or three months to pay off the credit card. This is a key detail to consider, since the APR doesn’t matter as much. If the original poster has a 20% interest rate, then the interest they pay will be far less than 20% of the current balance.
The business owner should calculate how the capital gains will affect their taxes. Short-term capital gains are taxed as ordinary income, which results in a higher tax rate. Since the business owner’s company is growing, they will likely have a higher tax rate than the average person.
If the business owner faces a high tax rate for the capital gains, it may be worth holding the shares if the two to three month timeframe is legitimate. It would be easier to justify selling shares right away if the original poster had no clear path to getting out of debt in several months or years without selling the stock.
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We Don’t Know The Stock
Knowing the business owner’s stock that has produced a 124% gain over the past four months would help with making the optimal decision. Some stocks continue their rallies, while others fade after posting that type of gain.
For instance, a meme stock that had a lucky break may not maintain a 124% gain. However, if a stock is at the forefront of an innovative industry and is posting incredible revenue growth, it may be worth holding on to the stock.
The idea of holding the stock instead of paying off credit card debt is only feasible since the original poster indicated they can get out of it in two or three months. Knowing the stock can lead to a more personalized suggestion that considers the business owner’s debt and assets.
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