April 15, 2009

Pay Off Credit Card Debt with Your Tax Refund

Tomorrow is the deadline for tax returns. Consumers carrying any credit card debt can make one of their best financial decisions if they take their tax refund and apply it to their credit card balance.

Yesterday, the AP released a survey that shows 57% of Americans expect a tax refund, and the average refund will be $2,700. The survey says 31% will pay down their credit card bills, up from 17% a year ago.

Consumers should use this refund to pay down the balance on their credit card with the highest rate. If the APR on your credit card is 18%, decreasing your balance by $2,700 can save you almost $500 in interest payments in just the first year.

Using your tax refund to make a large payment toward your balance will lead to more significant savings over time. Assume you have an $8,000 balance with an 18% APR and you make monthly payments of $200. Under that payment plan, it will take approximately 62 months to pay this off and it will cost $4,309 in interest payments.

Apply the $2,700 to your payment; the new balance is $5,300. It will take just 35 months to pay off your balance and you will pay $1,506 in interest payments, a savings of $2,803.

“Paying off your debt is a good investment. If your APR is 18%, decreasing your balance is similar to making an 18% return on your money. These days, you can’t find a sound investment with better returns than this,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

“Not only does it create a significant savings on that card, but it should also increase your credit score by reducing your debt to credit ratio, an important factor in your credit score. Long term, this can result in lower rates on all of your loans.”

Reducing the amount you owe also provides extra protection in this current environment of rate increases and credit limit decreases. The less you owe, the less you are affected by changes in terms and conditions.

By Bill Hardekopf

1 Comment

Posted in Business , Finance

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About the Author: Bill Hardekopf

Bill Hardekopf is the CEO of LowCards.com a free, independent website that simplifies the confusion of shopping for credit cards and helps consumers easily compare cards in a variety of categories.

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One Comment on Pay Off Credit Card Debt with Your Tax Refund / Add Your Comment

Imee says:

April 16, 2009 at 5:16 am

I personally think this is a wise use of a tax refund. I just got mine, but since I don’t have credit cards (anymore) I’ll just be using the money to pay other bills.

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