Should I Use My Tax Refund to Pay Off Debt?
It’s tax season. For many families, this means they will be receiving a healthy refund from the IRS. For 2020, the average tax refund is more than $3,100 according to the service’s own website. But before you spend this year’s windfall, stop to consider if it makes sense to use your tax refund to pay off debt. Let’s look at some of the reasons paying down your debt could be the smartest move this spring.
Credit cards can charge 12% or higher on your revolving balance. It may not seem like much when you see your monthly statement. But over the course of an entire year, it can really add up. Paying $1,000 towards revolving debt will save you more than $120 in interest this year. For those paying only the monthly minimum payment, the savings are even more as you prevent your balance from growing and accruing even more interest.
Increase Your Credit Score
Making a large payment toward your credit card debt can have a positive impact on your credit score. When you cut down your credit card debt, it reduces your debt ratio. In other words, the amount you owe becomes a smaller percentage of the credit available to you. Credit rating agencies like to see individuals who are not maximizing their credit limits. It shows them the ability to restrain and manage one’s spending.
Reduce Minimum Monthly Payments
Using your tax refund to pay down credit card balances will reduce your monthly minimum payments. This provides more flexibility of where you can allocate future debt payments. For example, if you are using the snowball technique to pay down your debt, it means you can put more money toward higher interest credit cards. In turn, you will pay off the highest interest credit card and move to the next card sooner.
Increase Your Leverage
As you pay down large chunks of your debt, you begin to create some leverage with credit card companies. For example, you may be able to transfer a high-interest rate balance to a lower interest rate card by freeing up room when you use your tax refund. Additionally, you can call your credit card company and ask for a lower rate before you transfer; you may receive an even lower interest rate.
Reduce Your Stress
Carrying credit card debt is stressful. While using your tax refund for something fun, like a vacation, your debt will still be there when you return. This can create or exacerbate “buyers’ remorse” which is when you regret making a purchase. With credit card debt, every month you’ll be reminded of the decision not to pay down your debt. By using your tax refund to pay down debt, each month you’ll have the great feeling you did the financially responsible thing.
Increase Your Savings
Your family likely has long-term financial goals. Retirement, college, or a new home are great financial achievements. But each goal requires a monthly financial commitment to get there. When you have credit card debt, your monthly payments may be preventing you from reaching your objectives. By paying down debt today, you will free up money each month that you can put towards your ambitions in life.
Using Your Tax Refund to Pay Off Debt
A debt-free life equals freedom. Freedom from monthly payments, debt collectors, and stress. But if your tax refund barely makes a dent in your credit card debt, it may be time to look at alternatives. One option is using a debt settlement program.
Debt settlement programs enlist professional debt negotiators to reduce your debt balances. There are many debt settlement companies out there. To determine if debt settlement might be the right solution for you, make sure you reach out to an accredited and certified organization like Umbrella Debt Relief.