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Using Your Tax Refund to Pay Off Debt

Getting a sizeable tax refund can feel like a bonus. You may be tempted to put it toward something new or fun like a bigger TV or a vacation. However, think twice before using your tax refund for nonessential expenses. It may feel good at the moment, but it is often not the most beneficial use of these funds. If you are carrying debt, such as bank loans, credit card balances, and educational loans, then consider putting your refund toward them. There are multiple benefits to this.

If you are wondering about the best way to use your tax refund or you believe you need more financial help than your refund can provide, contact Cleveland debt relief attorney Cleveland Bankruptcy Attorneys. He can review your financial situation and explain your options.

Call us today at (216) 586-6600.

Using Your Tax Refund to Your Benefit

While you may be in need of a vacation, your financial situation may have a greater need to tackle some of your debt. An annual tax refund of hundreds or thousands of dollars gives you a unique opportunity to pay more on your debt than you are normally able. Consider these situations:

  • If you have accumulated a great deal of interest on a loan with compound interest, it is to your advantage to pay off as much of this interest as possible. With compound interest, your debt will only compile faster.
  • If you regularly cover the interest on your debt yet are not able to reduce the principle, now is your chance. A sizeable refund could pay off your monthly interest and a bit of the balance, reducing next month’s interest payment.
  • If you have fallen behind on one or more payments, now is the time to catch up. Your tax refund could bring you up-to-date on a loan, which can help your credit history and score.
  • If you have managed to whittle down a loan to only a few more payments, your refund could help you finish it off, relieving you of a monthly payment.

There are many benefits to using your refund to pay off some debt. Not only will you see one or more of your balances go down, your refund can help you improve your credit score and keep away harassing creditors and debt collectors.

Which Debt Should You Pay?

If you have multiple loans or credit cards, you may wonder how you should put your refund toward them. Should you put a small amount toward all of them or should you put your entire refund toward one account? The right move for you depends on the terms of your specific debt. If you are behind in any of your debts, these need to be addressed immediately. Being in arrears will lead to greater problems down the road, including additional fees and being sent to collection. It will ruin your credit score.

If you are up-to-date on all of your minimum payments and your loans and credit card accounts have relatively similar amounts of interest, then it may benefit you to target the largest balance with your refund. Reducing the largest balance can help you lower your future monthly payments. However, it is unlikely that all of your debt has similar interest rates. Take a look at which accounts have the higher interest rates. A smaller amount of debt with a higher rate may cost you more in the long term than a higher amount of debt with a lower interest rate. That is why you may want to target your accounts with the highest interest rates, not necessarily the highest current balance.

Are You in a Great Deal of Debt?

If you are in so much debt that you know your tax return will not even make a dent, contact the Cleveland debt relief lawyers of Cleveland Bankruptcy Attorneys right away. There are legal and financial options to relieve some of the pressure of your debt and put you on a better path for the future. You may even be eligible for bankruptcy, which can help you wipe the slate clean and start over.

Call us today at (216) 586-6600.

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