Using coronavirus stimulus check to pay off credit cards? Here's what you need to do first

Paying off high-interest credit card debt may be a smart move if you're planning on using your coronavirus stimulus check toward bills. (iStock)

You’ve probably heard the good news: the government is giving Americans stimulus checks of up to $1,200 per adult and an additional $500 per child under age 17. Many taxpayers have already received their money via direct deposit, and more checks are on the way for people who are waiting for their cut.

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If you haven’t received a stimulus check yet, you can track the status of your check on the IRS website’s Get My Payment tool. Whether you receive a check, though, depends on your income and filing status. Single filers whose 2019 adjusted gross incomes (AGIs) did not exceed $75,000 are eligible for the full $1,200 payment. From that point, payments shrink by $5 for every $100 of income, before expiring at $99,000. And married couples who file jointly are eligible for a full $2,400 payment if their AGIs do not exceed $150,000. After that point, payments shrink by $5 for every $100 of income, before expiring at $198,000.

Of course, if you receive a check the big question you have to ask yourself is, “How am I going to spend the money?”

PROTECT YOUR CREDIT SCORE DURING CORONAVIRUS CRISIS — 5 THINGS YOU SHOULD DO RIGHT NOW

What you do with the money is up to you, but many financial experts recommend people prioritize paying off credit card debt, since high-interest debt compounds quickly. That advice applies to millions of Americans, especially considering the average credit card debt was $6,194 in Q2 2019, according to an Experian study. And, according to one survey of more than 1,000 Americans, 43 percent of respondents said they planned to put their stimulus check toward debt.

Here’s what you need to know if you’re thinking about using your stimulus money to pay off credit card debt.

Should you use your stimulus check to pay off credit cards?

How you choose to spend your check may be painfully clear if you’re unemployed or just strapped for cash: You may need to use the money to pay for essential living expenses, such as housing, food, clothing, and health care costs to make end’s meet.

CAN YOU NEGOTIATE YOUR CREDIT CARD DEBT?

From March 15 to April 25, roughly 30 million people filed for unemployment, according to the U.S. Department of Labor's unemployment figures. If you’ve lost your job, your first order of business is to file for unemployment benefits. You can find out what the qualification requirements are in your state and get links to apply for benefits at CareerOneStop.org.

But, if you’re still employed and don’t have trouble paying your bills, now may be a good time to chip away at credit card debt. Here are some pros and cons of using your stimulus check to pay down revolving credit card debt:

Pros:

  • It can improve your credit score. Too much debt can drag down your credit standing. Therefore, attacking some of your credit card debt can raise your credit score.  
  • It can save you money on interest. Carrying a balance from month to month usually means you’re paying more money in interest. (As of February, the average annual percentage rate for a credit card was 15.09 percent, according to the Federal Reserve). So, if you’re making only the minimum payments on your credit card debt, upping your monthly payments, or making one lump payment, can help you pay off your balance faster and save you hundreds or even thousands of dollars interest in the long run.  

Cons:

  • You may be better off beefing up your emergency fund. If you don’t have a sufficient rainy day fund—generally, enough to cover three to six months’ worth of living expenses—putting your stimulus money in a savings account can help you build what experts say is a vital financial cushion.  
  • Your credit card debt may not be accruing much interest. A number of credit card companies are helping customers who are struggling financially by lowering interest rates, extending payment deadlines, or waiving late fees—meaning your stimulus check might be better spent in other ways.

What to do if you’re using a stimulus check to pay off credit card debt

Here are a few steps you should take if you’ve decided to put your stimulus money towards credit card debt:

  1. Assess the balances on all of your credit cards. If you have multiple cards, find out how much you owe on each account.
  2. Start by paying down the credit card debt with the highest interest rate. Although some financial experts recommend paying off the credit card account with the smallest balance first, the way to save the most money in interest is to pay off the credit card debt with the highest interest rate first.
  3. Pay off the account with the next highest interest rate. Then continue the process until all your credit card debts are paid.

Can debt collectors go after your stimulus check?

In some cases, yes. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a private debt collector can seize your stimulus check to satisfy unpaid medical bills, private student loans, outstanding court judgments, or outstanding credit card debt.

However, some states have laws, or have passed orders, that prevent creditors from garnishing stimulus checks. For example, New York recently blocked banks and debt collectors from seizing stimulus payments from New York residents.