Pay Off Debt Quickly

Tax refunds from True Credit by Transunion
Waving a tax refund check at someone who has substantial credit card debt is like taking a Biggest Loser contestant to an all-you-can-eat buffet. It might seem like a form of torture, but all we can say is, resist spending that refund money and apply it toward your outstanding credit debt. Here’s why: you’ll get an immediate return of 18% or more, depending on what the interest rate is on your credit card. If you spend the money on a mortgage payment or home improvement instead and leave the credit debt to grow, you’ll be dogged by ever-increasing interest charges. Like the Biggest Loser contestant skipping the buffet, we recommend not even imagining what you could spend the refund check on.
Paying off debt is more critical this year
Sound like familiar tax season advice? Yes, but the 2009 tax season is different. Banks are tightening credit. Real estate values and mortgage rates might be dropping in some places, but that doesn’t mean credit is any easier to get. So besides paying off credit card balances to prevent having to pay interest charges, you just might be helping your credit score.. Remember, part of what credit bureaus use to determine your score is your debt-to-income ratio. The less available income you have going toward debt, the better for your credit score.
Let’s face it: paying down credit card debt isn’t fun. It’s much more immediately gratifying to spend the money, particularly on something you’ve wanted for a long time (for some of us, that might be a shopping spree in New York, for others it’s the ultimate man cave). Plus, it’s easier to justify spending that money if it’s a necessity rather than a “fun” purchase: a new stove, a new fan belt, new clothes for the kids.
The (almost) painless way to reduce debt
Now, we’re not telling you to let your kids go barefoot or drive in something that puts your life at risk. However, the sooner you pay off credit debt, the more flexibility you have to spend the money on other things. A refund check from Uncle Sam is an almost painless way of making a substantial inroad. (Yes, we feel the pain of not being able to spend the money, too.) Let’s say your outstanding credit balance is $13,000 and your refund is $800. How many months of paychecks would it take you to apply that much to your credit card balance? Isn’t it easier now to just wipe off a substantial percentage in one fell swoop? Won’t that make you feel better—at least as good as using it to take a vacation in Hawaii?
If images of Oahu are still hula dancing in your brain, do the numbers. Take a hard, cold look at what you still owe now and how much less you’ll have to pay back (and worry about interest on) once you apply that refund check to it. Feel better now?
Next Year: No Refund?A parting word: as much as you might look forward to your refund, for next year, consider adjusting your withholding to get a smaller refund (or none). Then you’ll have