Tax season is officially here, which makes now the perfect time to create a plan for how to use your tax refund. Being intentional with your refund can help you better manage your finances and move closer to your goals.
One area where using a tax refund to pay off debt can make a meaningful impact is cleaning up your credit and reducing balances. Planning ahead allows you to act quickly and confidently when your refund arrives.
Credit and debt are often intertwined, but looking at each separately is helpful. Below, I’ll walk through three steps to help you strategically prepare to use your tax refund to reduce debt.
Know What’s on Your Credit Report
Before you decide where to apply your tax refund, you need to be confident the debts you’re paying are accurate.
- Pull your credit report for free at Annual Credit Report annualcreditreport.com
- Look over your report to be sure the details are correct.
- If the information is incorrect, you are able to dispute it. Do this first so your tax refund doesn’t go toward incorrect debts.
- If you need help navigating your report, Apprisen offers credit health education.
Organize Your Debts
Because a tax refund is a lump sum, organizing your debts helps you decide where that money will have the greatest impact.
- List all your debts. Include the balance owed on each.
- Focus on unsecured debts like credit cards and loans that are not connected to another item.
- Determine and notate the interest rate on each account. Starting with the highest interest rate to prioritize how your refund may be used.
Create Debt Repayment Strategy
- Review your take home income and cost of your living essentials (housing, food, utilities, insurance are examples). Then, determine how much of your surplus can go towards debt payments.
- To pay off debts on your own consider using the debt snowball or debt avalanche method.
- If your tax refund can fully pay off a lower-balance debt, that may be a smart place to start. Eliminating an account can provide a motivational boost and help build momentum. This is the snowball method.
- If your priority is saving money on interest over time, consider applying a portion or all of your tax refund toward the debt with the highest interest rate. This is the avalanche method.
- If you are carrying multiple high-interest debts and your balances feel difficult to manage even with a tax refund, there’s a reputable option. A Debt Management Plan may allow you to combine eligible debts, lower interest rates, and create a structured and personalized path to financial freedom
In summary, strategizing how to use your tax refund before you file can reduce stress and help organize your finances. It also opens opportunities for you to reach other financial goals during the year.
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