Using Your Tax Refund to Pay Down Credit Card Debt
From GreenPath Debt Solutions
Will you receive a tax refund this year? If so, would you consider putting the money in a savings account that guaranteed earnings of about 50 percent over two to three years?
Those are exactly the kinds of returns you could potentially enjoy by using your tax refund to make additional payments on your credit cards. Even if you are on a debt management program (DMP), the savings can be significant. The exact figures vary based on debt amount, interest rate and time on the program.
For example, let’s say you have three years of DMP payments remaining on a credit card with a $5,000 balance and a 15 percent interest rate. If you make a one-time payment of $1,000 and then continue to make your regular DMP payment, the impact may surprise you. The account would be paid off about eight months sooner than expected, and you would avoid paying about $493 in interest. In this example, you would have turned your $1,000 into nearly $1,500 in 28 months!
“Don’t underestimate the power of compound interest,” said Rus Halsey, GreenPath’s director of counseling operations. “People like to buy things with tax refunds, but it’s smart to pay down your debt as quickly as possible. The sooner you pay off the debt, the sooner you stop paying interest.”
When the debt is finally paid off, you will not be paying any interest and will have more money to spend each month on whatever you want. At that point, the additional disposable income will be like getting a pay raise.
If you have some extra cash for your credit cards, you’ll need to decide which account should receive the funds. In general, consider the accounts with the highest interest rates or the smallest balances. Depending on your specific circumstances, it may make more sense for you to use the refund for other purposes such as building emergency savings or paying another bill that is not on the DMP.
If you are on a debt management plan, consult your GreenPath counselor or account maintenance coordinator. They can review your situation and help you decide the best way to use the extra cash.