Should You Use Your Tax Refund to Pay Off Debt?

The new year brings exciting beginnings, infinite possibilities…and the tax season. While filing taxes is no fun, receiving your refund certainly can be. It’s tempting to splurge on your wish list once you receive your refund, but there are likely better ways to utilize the refunded money.

Last year, the average tax refund was $2800. Your refund amount depends on your financial situation, which tax credits you have, and how much money was withheld from your paycheck each month. There are many ways to utilize your tax refund, but we are here to advocate for paying down outstanding debt with at least a portion of your refunded money.  

When you think about your tax refund, consider it money you’ve earned. This isn’t bonus money, you’ve worked hard for it – so it makes sense that you’d want to invest it into a stronger financial future, rather than binging on a weekend trip or entertainment. There’s no right or wrong way to utilize your tax refund, but when you use it to pay off a lump sum of your debt, you will realize significant advantages. In addition to reducing interest costs and making the overall cost of your debt less expensive, you’ll bump up your credit score by reducing the amount of credit that you’re using (learn more about credit ratio). 

It’s also important to note that all debt isn’t created equally. It’s tempting to use your tax refund to decrease your mortgage or start a savings account, but at the end of the day, you pay more money for outstanding debt than you will earn otherwise. Debt interest rates can be in double digits, while even the best savings account usually doesn’t hit over 5%. When it comes to your mortgage, paying a little extra each month will normally obtain the same results as making a lump sum payment (so the advantage isn’t as great). 

When applied to your existing debts, a tax refund will go furthest if you’re enrolled in a debt program, as these programs reduce interest rates and fees. Additionally, if you are struggling with a variety of debts, a good debt program can provide excellent support and make repayment much easier and more affordable for your budget.  Ready to explore options for debt repayment? Contact our Debt Relief Experts, and we will be happy to walk you through our variety of alternative solutions for affordable debt repayment.