How Does Cashing Your 401k Affect Your Credit Score?
Your credit score is widely used by banks and financial institutions to determine whether to issue you credit. Insurers, landlords and even cell phone companies may also require it before approving your application.
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401k Facts
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Your 401k plan is a retirement savings plan that you contribute to through your employer. Many people take advantage of the tax benefits from the Internal Revenue Service and employer matching contributions that some companies offer.
Function
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Cashing out your 401k plan does not affect your credit score because your 401k is not a credit account like a credit card or mortgage.
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Considerations
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Even though the 401k cash-out does not directly impact your credit score, you may be able to improve your credit score depending on how you spend the money you take out.
Benefits
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If you pay off old debts or reduce existing balances with the money you have taken out of your 401k account, your credit score may increase because you have improved your standing on your credit accounts.
Warning
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If you withdraw money from your 401k account before you reach age 59 1/2 (if you are at least 55 when you have left your employer), you will owe a 10 percent early withdrawal penalty in addition to income taxes.
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