How Your Tax Refund Can Eliminate Your Debt?

tax refund to eliminate debt
It’s no surprise that credit card debt is a big concern but what many don’t know is their neighbors are using their tax refund to eliminate debt.   New data from the National Foundation for Credit Counseling found that 39 percent of households are carrying a balance on their cards from month to month — and 16 percent are rolling over $2,500 or more. Last year, these figures were as high as 35 percent and low as 14 percent, respectively.
 At the end of 2016, the median household carrying credit card debt owed $16,748, according to a NerdWallet study of Federal Reserve stats.  The average income tax refund was $2,701 for the tax year 2015, according to CPA Investment Advisors — that could be a big help in staying on top of those bills.

Tax Refund Strategies to Cut Debt

“Paying down debt should be your No. 1 priority,” said Odysseas Papadimitriou, chief executive of comparison site WalletHub.com. To determine which credit card balance should take priority, make a list of what you owe, detailing balances and interest rates. Then pick a strategy.
Some consumers prefer to focus the highest-rate debt first (aka, the avalanche method); others knock out the smallest balance first (aka the snowball method), said Greg McBride, chief financial analyst at Bankrate.com.  One saves you more money in interest, while the other can free up money in your budget to roll into paying down other debts.
Factor in any balance that is interest-free or other promotional offers, and when they end, said Papadimitriou. Although that’s technically your lowest-rate debt, it may be a more pressing priority and you’ll soon have a much higher rate.
“In reality, you may have paid off the wrong credit card,” he added.
Americans who use their tax refund to pay down credit card debt should also look for ways to improve their cash flow, said Andrea Blackwelder, a certified financial planner and a co-founder of Wisdom Wealth Strategies in Denver.  Take a good look at your budget and spending habits to avoid finding yourself in the same situation next year.
Consider adjusting your withholding to reduce your refund that at tax-time and more in your paycheck year-round, she said.   That might help you avoid new debt and keep on top of paying down old debt.
“What may be a necessary focus is how did you get there and how do you keep it from happening again?” she said.
Don Briscoe
Follow me

Don Briscoe

Finance educator, advisor, and leading voice in the global financial literacy movement.Founder and editor of MoneyPacers.com.He lives and enjoys life with his family in New York.
Don Briscoe
Follow me

Leave a Reply

Your email address will not be published. Required fields are marked *