Important questions:
1) What kind of interest rate is the 401k earning? 5% ?
2) What would they do with the extra “income” once they pay off the house? Is that money earning any interest? Probably not.

By touching the 401k, you take money that is working and earning interest and getting rid of it. It isn’t a bad decision cuz you are taking money that is earning at, say 5% and paying off a loan costing 15%.

But, you’d do better taking money that is earning 0% and paying off the 15% loan, letting the 401k grow while they pay off the debt with money that isn’t earning interest anyway.

By using their “normal” income, they would have less cash to spend on crap they don’t need. It’s a harder pill to swallow, but you are giving up less because you are not diminishing their capital that is earning interest.

I’d make them do it the hard way.

Also, the difference in interest between a HELOC and a credit card is pretty significant – several percentage points, I’d guess. And, the effective after-tax interest rate of the HELOC is 15% below that if they can write off the interest.

NOTE: One factor in deciding your credit score is your credit limit – to – balance ratio. That is, your credit score would be higher if you have credit cards with a $10,000 limit and a $5,000 balance than if you have a $5,000 limit and a $5,000 balance.

Closing credit cards with no annual fee and zero balance isn’t always a great idea – it can actually hurt your credit rating.