1 in 3 Americans With a Tax Refund Will Use It to Pay Off Debt. Here's How to Tackle Yours Efficiently

For some people, filing taxes this season isn’t all bad. Many filers have submitted their returns only to learn that they’ve got a refund coming their way.

If you’re anticipating a tax refund, you may be tempted to spend that money on something fun, or on something you’ve been trying to save for over many months, like new furniture. But instead, it’s a smart idea to use those funds to better your financial situation.

In fact, a good 36% of filers with a tax refund plan to pay off debt with that money, according to data from Assurance. And if you’d like to tackle a similar goal, here’s a good way to go about it.

Read more: we researched free tax software and put together a list of the best options here

Consider a balance transfer

If your tax refund will be large enough to cover all of your outstanding debts in full, then you can simply take that money and use it to tackle each debt one at a time in short order. But if your tax refund will help you eliminate a big chunk of your debt, just not all of it, then you may want to consider transferring your various credit card balances onto a single card with a 0% introductory APR.

Let’s say you’re getting $3,000 back from the IRS this season and you owe $4,000 on your credit cards. If you’re able to pay off all but $1,000 of that balance, it’s conceivable you may be able to knock out the remainder in a year or slightly more. Meanwhile, many balance transfer offers give you 12 to 15 months (sometimes more) of 0% interest, so there’s a prime opportunity to enjoy a reprieve from interest and rid yourself of debt for good.

Look at a personal loan if you’ll still be left with a large balance post-refund

A balance transfer could be a smart move when your tax refund will help knock out most of the debt you owe. But if your refund will only work to eliminate a portion of it, then a personal loan could be a better bet than a balance transfer.

A personal loan won’t give you a period of 0% interest. Instead, it will give you a fixed interest rate on your debt so your monthly payments are predictable. And the interest rate a personal loan charges is likely to be considerably lower than the interest rate a credit card charges you.

So let’s say you’re getting a $3,000 tax refund this season but you’re in debt to the tune of $7,500. That $4,500 remaining may not be something you can pay off during a credit card introductory period, so a personal loan may be more optimal in that scenario.

It’s encouraging to see that so many Americans are planning to use their tax refunds to pay off debt. If you owe money in some shape or form, consider doing the same. The sooner you tackle your debt, the less money it’s apt to cost you.

That said, the one time it doesn’t pay to use your tax refund to tackle debt is when you have no emergency savings. In that case, your refund should go into the bank. Otherwise, you might risk landing in debt the next time an unplanned bill pops up.

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