Got a tax refund? Then get out of credit card debt!

By Ben Woolsey

If you are a savvy taxpayer and have already filed your tax refund, you are to be commended. An alarming number of filers wait until the 11th hour to stand in line at their central post office drop-off window and sneak their payments in under the wire. But if you are eligible for a refund, it only makes sense to file as early as possible, right?

Taxes, credit, debt and you
These CreditCards.com articles about taxes, credit and debt will help you navigate tax payment options, tax liability, tax-time identity theft and manage your credit and debt at tax time. Pros, cons of paying taxes with a credit card Beware of IRS tax bite that may follow canceled debt Sign-up bonus rewards may be taxable Tax refund theft surges Refund anticipation loans live on in new disguises

Maury Randall, professor and chair of finance at Rider University, agrees that it's wise to use tax refunds to combat credit card debt. "I even tell my students that before you put anything in stocks and bonds, one of the best investments you can make is to pay off your credit card debt," Randall says. "It's a risk-free return, and not only that, but the interest you pay on credit card debt is not tax deductible. And putting your refund toward debt is probably the best investment you can make if you have a large amount of outstanding debt, unless there is something else incredibly important that you need to spend the money on."

Becoming debt free usually requires numerous steps, starting with changing the fundamental behavior of spending money you don't have. You can't start chipping away at the debt until you stop building it. And if you add a big tax refund, it can be like double dose of dynamite blasting away a chunk of that mountain of credit card debt.

With the average credit card rate hovering close to 15 percent for new card offers, consumers pay dearly for previous year's spending party. The financial headache lingers unless you confront the enemy. Sudden increases in existing credit card interest rates instituted by banks and credit card issuers prior to the enactment of the Credit CARD Act of 2009 have shocked consumers into action when facing ever-increasing minimum payments.

Sky-high interest rates are another incentive to get rid of that debt as soon as possible. "Interest rates are quite high on credit card debt and you can't typically get the return that the credit card company is charging you," Randall says. "Putting your refund toward debt is a safe return -- every time you pay your credit card debt, you know for certain that you'll be saving that interest expense."Other prudent steps to get out of credit card debt and becoming debt free include transferring balances over to a 0 percent APR credit card (such as a  balance transfer credit card) or some other type of debt consolidation loan. Then you can apply all of your future payments to the principal and not have to waste any more on interest.

Tax refunds are always a welcome surprise this time of year. Be sure to use yours wisely.

Published: April 2, 2006

	Three most recent Legal, regulatory, privacy issues stories: FTC targets cash-reload code scams – The FTC has proposed banning telemarketers from taking payments via cash reload codes that are used to fund prepaid cards. The codes make it too easy for fraudsters to take cash without leaving a trace ... How to pick a bankruptcy attorney – That’s it, you’re done. After struggling to pay your debts, you’re ready to consider bankruptcy. It’s time to contact a lawyer to represent you, but which one? ... Proposed rule could help kids replace stolen Social Security numbers – The Social Security Administration is considering easing the process for replacing stolen SSNs for children 13 and younger, who are increasingly targeted by identity thieves ...

	CreditCards.com's newsletter Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!