5 Ways Your Tax Return will Pay off Your Debt
Being in debt can feel almost crippling. Not only can it takes its toll on your finances and credit score, in particular, but it can also be emotionally burdensome as well. However, there is some relief in sight in the form of your annual tax return. In general, there are five distinct ways that you can use your tax return to pay off your debt.
Start an Emergency Fund
In an ideal world, you should have access to an emergency fund for those necessary purchases in life that just seem to pop up unexpectedly. You never know when your roof may have a leak and warrant a full replacement, or when your car might break down and need repairs or if you might get laid off from your job. However, if you don’t have an emergency fund stocked away in a savings account at the bank or in a cookie jar at home, you can run into trouble when you fall into debt. Using your tax return can help. One great way to pay off your debt is to pull at least $1,000 of your return to put in savings for an emergency fund. If your tax refund is on the small side, you can still take a few hundred dollars out to put in savings and use the remainder to pay off your debt.
Pay Off High Interest Debt First
Of course, your biggest concern is the debt you have amassed. No doubt, it seems to build up more and more with each passing day. The best thing you can do with your tax return at this point is to focus first and foremost on your high interest debt. Use as much of the money from your refund as possible and put it toward paying any and all debt that has the highest interest rates. For instance, if you have credit card debt on two different cards and one has an interest rate of 22 percent and the other has one that is only 12 percent, you should focus on paying off the former credit card first. Although you may still have debt afterward, this can ease your financial burdens considerably. It can help to save you hundreds of dollars in fees going forward.
Pay Back Late Payments
Your payment history affects your credit considerably as it makes up 35 percent of your credit score. If you have any late payments, using your tax return to pay them off is a great way to pay off your debt and improve your credit. You can also use the cash from your tax return to cover any debts that have already gone to collection. You can find out which debts are in collection by checking your credit report.
It’s worth noting that delinquent accounts can stay on your credit report for up to seven years. However, when you take care of late payments sooner rather than later, they will disappear sooner as well. That can only benefit your credit and your wallet in general.
Pay Off Student Loans
Student loan debt can also be extremely overwhelming. Putting your tax return toward paying back those loans can ease the financial burden to some extent. If you can pay off your loans faster, it will also reduce the amount of interest you are responsible for paying as well. In turn, you will reduce your debt and gradually improve your credit score.
Get a Secured Credit Card
If your credit is less than satisfactory and you’re in debt, you might want to use your tax return to get a secured credit card. This type of card is different than standard cards because it requires a deposit of your own money to make up your credit line. Making timely payments toward your debt with a secured credit card can help you to lessen your financial burden and eventually enable you to qualify for a regular card. It can also help you to develop good financial habits as you pay back your debt.
It’s wise to put your tax refund to good use. While it might be tempting to just use it in its entirety to splurge on something special, it’s better to be thoughtful about where the money goes, especially when you’re in debt. In the long run, it will benefit you.