44% of Americans Are Using Tax Refunds to Pay Off Debt. Here’s Why You Should, Too

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Have lingering debt? Read on to see why your tax refund could be a good way to get rid of it. 

Inflation has been a problem for U.S. consumers for roughly two years. And it’s forced a lot of people to rack up debt, from credit card balances to loan balances, just to stay afloat. It’s also resulted in many people falling behind on regular bills, like rent and car payments

It’s therefore not totally surprising to learn that 44% of Americans are planning to use their tax refunds to pay off debt or bills this year, according to a CNBC Your Money Financial Confidence Survey, conducted in partnership with Momentive. And if you have a refund coming your way, it pays to do the same.

Use your tax refund to shed your debt

As of May 5, the average tax refund issued by the IRS this season was $2,803. And if your refund is comparable, then chances are, you have a prime opportunity to get caught up on a number of bills or make a nice dent in your existing debt.

If you have multiple debts, it’s best to use your refund to chip away at your most expensive balance. So let’s say you owe $1,500 on a personal loan and $3,400 on a credit card. You may be inclined to pay off the personal loan first, since you’re looking at a smaller balance. But if your credit card is charging you 20% interest, and you locked in your personal loan at 7% interest, you’re going to save a lot more money by trimming your credit card balance.

Better your finances on a whole

Even though recent and current economic circumstances have forced a lot of consumers into debt, you may not actually have any. But in that case, you should still make a point to put your refund to good use.

For one thing, see how well you’re doing on emergency savings. If you don’t have enough cash in the bank to cover at least three full months of essential expenses, then it’s a good idea to stick your refund into your savings account.

Otherwise, if your emergency fund is nice and strong, consider putting your refund to work by investing it, whether in a brokerage account or an IRA. And if you already have plenty of money invested, think about the other ways that money could serve a longer-term need.

Maybe there’s a $1,200 online course that could make you a lot better at your job and set you up for a promotion. Your refund could potentially pay for it. Or, it could be money you use to attend a professional conference in another city that your employer doesn’t want to pay for but could help you expand your network of contacts.

All told, when a tax refund comes your way, it’s best to put that money to good use. If you have outstanding debt, then by all means, make paying it off a priority. But if that’s not the case, think about the different ways you can make the most of that IRS payday.

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