Published January 18, 2013
If you are among the lucky Americans expecting a tax refund this year, it’s tempting to use the money on something fun like a tropical vacation or the latest high-tech gadget, but it’s in your best interest to use the refund to pay down your debt.
If you are carrying credit card debt, it’s in your best interest (pun intended), to use your return to reduce your debt—here’s why:
It's "found" money. It can be hard to shrink your savings to pay off debt, but experts advise using low-interest savings to pay down high-interest debt, and using refund money means you won’t miss the money in the first place.
Make a deal with yourself: Pledge to use 80% of the refund to pay off any credit card balances or other debts and then put 10% into your emergency fund or savings account and the last 10% on a fun purchase.
You'll save money on interest in the long run. Don’t think of using the refund money on debt as a waste—it’s extra money in your pocket each month. Paying monthly interest charges are equivalent to throwing money in the trash.
This might be your only chance this year. When else will a significant sum of money come your way that isn’t spoken for? Unless you get an annual bonus or you get lucky at the casino, tax time is your best bet to put a dent in your debt.
Your credit score will thank you. The less money you owe, the better position you are in to improve your credit score. A good portion of your score depends on how much you owe compared to how much credit you have available—the lower this ratio, known as your debt utilization-- the better your credit score.
You’ll sleep better. Owing money is stressful and makes daily financial planning and budget hard. By eliminating one of your monthly expenses, you’ll have more wiggle room if an emergency does come up.
Roman Shteyn is co-founder of Credit-Land.com. He writes frequently on credit-related topics.