Four Reasons to Use Your Tax Refund on Debt

People who expect to get a tax refund this year have probably already started daydreaming and planning on what they’ll do with the extra money. Last year, the average tax refund was around $3,000. While you may be tempted to use the money on a vacation, shopping spree, new furniture, or electronics, there may be a better way to spend your tax refund – on your credit card debt.

The average credit card debt per borrower was almost $5,000 in the 3rd quarter of 2012. Your tax refund may not be enough pay completely pay off your credit card balances, but it will knock out a big chunk of your debt. Even if you can’t completely get rid of your credit card debt using your tax refund, it’s still a good idea to use your refund to pay down what you owe.

You could lower your minimum payment. Credit card minimum payments are calculated as a percentage of your balance, e.g. 3% or 5%. As your balance decreases, so does your minimum payment. Dropping a few thousand dollars on your credit card balance would significantly lower your minimum payment, making it easier to pay your credit card each month. And if you keep your monthly payments the same as before the balance decreased, you’ll get rid of your debt even faster.

You could save hundreds or thousands in interest. The longer it takes you to pay off your credit card balances, the more you’ll pay in interest. If you could pay your credit cards completely with your tax refund, you’ll avoid all the interest you would have paid if you’d taken months or years to pay off your debt. Even if you just reduce your balance, you’ll still save interest as long as you pay your balance quickly.

You’ll free up the monthly payment you were already sending to your credit cards. Ideally, you’d be able to pay off your entire credit card balance with your tax refund. Sure, you wouldn’t be able to send that refund money on anything “fun,” but you’ll have so much more wiggle room in your budget once you’re no longer paying hundreds on your credit cards each month.

You’ll be closer to becoming debt-free. Paying as much as you can on your debt whenever you can, puts you that much closer to your goal of debt freedom. Using your tax refund may seem like a big sacrifice, but it’s worth it.

You may have some financial obligations that are far more important than paying off credit card debt. For example, if you’re behind on mortgage payments, your tax refund may be better spent keeping you out of foreclosure, assuming you have enough to accomplish that. Or, if you have several payday loans, cash advances, or a title loan, your tax refund can help pull you out of that hole. The best use for your tax refund is to improve your financial situation, not just to have fun.