Use Your IRS Tax Refund to Lower Credit Card Debts
Anyone living with debt, whether from loans or credit cards, is asking how they can lower their debt fast. The best way to lower debt is to make on time payments each month for more than the minimum amount due. By making on time payments, you reduce your risk of incurring late fees and of having your interest rate raised. By making more than the minimum payment you are reducing the balance of your cards and, therefore, reducing the amount of interest that incurs each month, which is calculated using the outstanding balance each month.
The Best Way To Use A Tax Refund – Pay Off Credit Card Debts
Those who receive an income tax refund after filing their income taxes during the year can use their refund to help pay down their debts. Even if the tax refund is not enough pay off all of your debts, you can make a significant dent in the amount of your debt by using your refund to help pay it down.
It is an easy decision to make to use your income tax refund to help pay your debts off; often, the difficult decision lies in deciding HOW to use your income tax refund to pay down your debts. If you have only one credit card or one loan the answer is easy. However, if you have more than one debt, the answer is a little more complicated.
Which Debts To Pay Off First?
The first thing you need to do is to create a list of all your debts, the interest rates on each and the amount you pay for each individual debt each month. Then you need to consider your situation. If you are struggling to make ends meet and often find you cannot afford to pay your bills or that you cannot pay your monthly expenses such as groceries and gas, you should consider using your income tax refund to pay off the debts that cost you the most in payments each month. This way, you will free up some of your funds so that you are not struggling as much and may even have additional funds to use to pay your debts down further each month.
If you are not struggling to pay your bills and survive, then you need to use your tax refund to pay down your debts in a different manner; the smartest way to pay down your debts is not to pay them to save more money each month, it is to pay them to save more money over the long term.
For example, paying off your debts with the highest interest rate, or at least paying them down with your federal tax refund will help you to save more money over time than paying a little to each card or even paying off several different low balance credit cards.
Pay Off High Interest Credit Cards With Your Federal Tax Refund
Say you receive an income tax refund of $5,100 and your total debt is $10,000. If you have two cards with a small balance of 9.9 percent and balances of $1,000 each and you have a third credit card with an $8,000 balance and a 29.9 percent interest rate, it is absolutely in your best interest to allot your $5,100 income tax refund to that larger credit card, even though it will not pay the balance in full. Each month you are accruing less than $10 interest on your two smaller debts; you are accruing more than $200 per month in interest. Using your income tax refund to pay that debt will save you thousands of dollars in the long run.
Additionally, using your IRS tax refund to pay your credit card debt down will make it easier for you to pay off your other, less expensive debts. The money you were using to make payments on your higher interest rate cards can then be dispersed among your other debts to help pay them off more quickly.
The way to effectively do this is to use your income tax refund to pay off your higher interest rate debts first and then continue to employ this method. Once your highest rate card or cards no longer have a balance, you can use the funds that were going toward those monthly payments to increase the monthly payments you use on your smaller cards, which will help you to pay them off more quickly.
Credit card debt and other debts are detrimental to your credit score and your financial security. It is imperative that they are paid off as quickly as you can manage. Using your income tax refund to pay them down is an excellent idea that you will not regret. Additionally, if you are receiving that much of an income tax refund each you, you should consider lowering the amount of withholding taken from your checks each month and use those funds to help pay down your debts even faster.