Deep in Debt? Your Tax Refund Could Bail You Out
Don’t let debt linger when there’s a windfall coming your way.
- Lingering debt could damage your credit and cause you to rack up a large amount of interest.
- If you have a tax refund headed your way, it pays to use it to get out of debt quickly.
It’s not unusual to find yourself with a pile of credit card debt. Maybe you lost track of spending and got in a bit over your head. Or maybe an emergency expense popped up out of the blue and you didn’t have enough money in your savings account to cover it in full.
A lot of people have also grown more reliant on credit cards in recent months due to rampant inflation. With living costs rising across the board, that’s not surprising.
Either way, if you’re sitting on a pile of credit card debt, it pays to work on eliminating it as quickly as possible. For one thing, the longer you carry that debt, the more interest you’re apt to rack up. Also, high levels of credit card debt could cause your credit utilization ratio to climb into unfavorable territory. Once that happens, your credit score could take a big hit, making it harder for you to borrow affordably when you need to.
Of course, the challenge of paying off debt is coming up with the money to do so. But if you filed your taxes and have a refund coming your way, that could be a good solution to your debt problem.
Put that tax refund to good use
Your tax refund may be large enough to cover all of your debt. Or maybe it can only cover a portion of it. But either way, it pays to use that money for debt payoff purposes, especially if you’ve been struggling to whittle down your credit card balances.
If you can’t get rid of all of your debt, you’ll want to use your limited funds strategically. Look at your different debts and figure out which are the most costly from an interest rate perspective. If you owe $500 on a credit card charging 20% interest and $800 on another card charging 16% interest, it makes sense to work on the $500 balance first.
Another option is to see if you qualify for a balance transfer. That way, you can move your various balances over to a single card with a lower interest rate altogether. Many balance transfer offers come with a 0% introductory APR, which gives you a reprieve from accruing interest for a period of time.
Try to stay out of debt
You may be able to use your tax refund to dig yourself out of debt and move forward with a clean slate. But if that’s the case, you’ll also want to take steps to avoid debt going forward.
Getting on a budget could really help you keep your spending in check and identify ways to trim your costs. If you’ve been struggling due to inflation, that’s an especially wise move.
You can also look at boosting your income by taking on a side hustle. The gig economy is loaded with options these days, so even if you’re dealing with constraints like not having access to a vehicle or childcare, you might still manage to find a side job that can be done remotely.
Credit card debt can wreck your finances and damage your credit significantly. If you have a pile of money on the way from the IRS, it could serve as your personal bailout — and help you get rid of your debt once and for all.