A tax refund is a welcome bonus for many families. If you are expecting a refund this year, it is important to consider all your options before deciding how to use your extra money.
Financial experts say that paying off outstanding credit card debt is one of the smartest things you can do. Tackle the credit cards with the highest interest rates first. Use your refund to pay off your entire credit card balance if possible. If your refund does not cover the whole balance, pay off as much as you can. By making a big dent in your balance you’ll lower your long-term interest costs. If you typically make only the minimum monthly credit card payments, you can find yourself with a large revolving balance that seems to never go down and that can take years to pay off.
Some people wonder if it makes more sense to pay off any outstanding installment loans, such as an auto loan, student loan, or a personal loan. There are several reasons why this is not the best option. Unlike credit cards, installment loans have set terms and payments. You know exactly how much you have to pay each month. And as long as you keep making on-time payments, your interest rates will not go up and you’ll pay off your entire loan within a predetermined amount of time.
Credit cards offer no such stability. Annual Percentage Rates (APR) on credit cards may increase at any time. Unless you pay significantly more than your minimum amount due, your balance can stay virtually stagnant – or even increase if the rates go up. You’ll be indefinitely in debt.
By paying down or paying off your credit cards, you’ll not only accrue less interest and get out of debt faster, but you’ll have your credit cards available to you if an emergency should arise.
If you don’t have credit card bills, use your refund to boost your savings or retirement accounts. You can also start an emergency fund or invest in your home by upgrading your appliances, doing some needed repairs, or purchasing new furniture.
Use your extra dollars wisely and make your refund work for you.
For more information on Tax Season please check out our 5 Smart ways to spend your Tax Refund Article