4 Reasons You Should Use Your Tax Refund to Pay Off Your Credit Card Debt
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- This year’s extended tax deadline of July 15 is approaching. If you haven’t already, a tax refund could be on your way shortly.
- With an average consumer holding $6,194 in revolving credit card debt, this mini-jacket offers a great opportunity to pay off your credit card debt.
- Using your tax refund to pay off your credit cards can save you money on interest, improve your credit score, and put you on the path to financial freedom.
- TaxAct is currently offering 35% off federal and state filings »
Tax day is fast approaching – remember the deadline was postponed to July 15 due to the coronavirus pandemic, although many have already filed their federal returns.
In 2019, the The IRS has issued $260.9 billion in refunds, an average of $2,725 per beneficiary. This kind of windfall is something a lot of people might be tempted to splurge on, but if you have balances on your credit cards, experts at all levels agree you should use it to pay off your debt.
According to Experian, the average credit card balance per American in 2019 was $6,194 — and for those who lost their jobs to the pandemic, the debt could be even higher in 2020.
Due to the high interest rates associated with credit card debt, it is the most urgent to pay off. If you’re expecting a tax refund, here are some of the reasons why you should use the money from your refund to pay off your credit card debt.
Save money on interest
Credit cards are easy for consumers to use, but this convenience can be very expensive if you don’t pay off your balance every month. Unless you charge a credit card with a 0% launch promotion on TAP, you pay exorbitant interest rates on every purchase you charge.
Households in the United States pay an average of $1,300 in interest each year.
“Credit card debt is probably the worst kind of debt you can ever have because the interest rates – basically, the cost of that debt can be in the double digits, which is usually much higher than any other type of debt like student loans or mortgage rates,” says Brett Long, CPA and chief operating officer at Alltime Power.
“Hardly anything you would buy with a credit card would increase in value at double-digit rates, so you’re going deeper into the hole the longer that debt remains unpaid.”
Increase your credit score
Even if you’re never late, your credit card debt can have a real impact on your credit score, keeping you from getting affordable interest rates when it comes to debt. other types of credit, such as a mortgage or car loan.
A whopping 30% of your FICO credit score is determined by your credit usage (the ratio of your credit card balance to your total available credit). If you go for a long time making only the minimum monthly payment on your credit cards, the credit reporting agencies will notice and this practice will start to eat away at your score. If your balance continues to swell, you’ll take another hit to your FICO score, especially if your credit utilization exceeds 33%.
Create a dynamic to free yourself from debt
Whether you are already actively pay off your credit cards, or if you’ve let it sit for a long time, there’s nothing better than erasing some of your debt all at once. That’s exactly what a tax refund can do for you.
“If you’re working on your debt plan, your debt-free date probably doesn’t incorporate ‘extras’ like a tax refund,” says Grayson Stalvey, a financial coach. “This is a great opportunity to jump-start your plan and get a head start. The upside is that it will help you get out of debt faster and pay less interest in the long run.”
Taking such a big step toward your goal of being debt-free can re-energize you and give you more motivation to stick to your budget and keep making those payments. Maybe you’ll be inspired to find new ways to cut costs so you can spend even more of your budget on your credit card payments and get out of debt much faster.
Switch to other financial goals
Credit card debt is a drag whether you have a little or a lot. The sooner you pay it off (and make a habit of keeping it), the sooner you can let go of that stress and focus on other financial goals.
To want build your rainy day fund? Having freed up money will help you save faster. To want to buy a house? Your improved credit score could help you get a lower interest rate on your mortgage. Ready to start investing? Now you will actually have more capital to use.
Your goals don’t even have to be that ambitious. If you use your tax refund to pay off your credit cards and pay off your debts, your stress load will be that much lighter. Even better, if you pay off your credit card debt, next year’s tax refund will really be money in your pocket.