Use your tax refund to get a grip on credit card debt

Using your income tax refund to pay down credit card debt could help you get back on track, financially.

One in 5 taxpayers expects to put tax refund cash toward a debt, and 28 percent will use the proceeds to pay bills, according to a new survey from TD Bank. A quarter of respondents said outstanding debt was their biggest hurdle to saving a tax refund. The bank polled 1,213 taxpayers in early March.

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It’s no surprise that credit card debt is a concern: New data from the National Foundation for Credit Counseling found that 39 percent of households are carrying a card balance from month to month — and 16 percent are rolling over $2,500 or more. Last year, those figures were 35 percent and 14 percent, respectively.

At the end of 2016, the average household carrying card debt owed $16,748, according to a NerdWallet analysis of Federal Reserve data.

“Part of what you have to focus on is how did I get there and how do I keep it from happening again?”-Andrea Blackwelder, co-founder of Wisdom Wealth Strategies

The average income tax refund — $2,860 for tax year 2015, according to the Internal Revenue Service — could be a big help in staying on top of those bills.

“Paying down debt should be your No. 1 priority,” said Odysseas Papadimitriou, chief executive of comparison site WalletHub.com.

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To determine which credit card balance should take priority, make a list of what you owe, detailing balances and interest rates. Then pick a strategy.

Some consumers prefer to focus the highest-rate debt first (aka, the avalanche method); others knock out the smallest balance first (aka the snowball method), said Greg McBride, chief financial analyst at Bankrate.com. The former saves you more in interest, while the latter can free up money in your budget to roll into paying down other debts.

Factor in any interest-free balance transfer or other promotional offers, and when they end, said Papadimitriou. Although that’s technically your lowest-rate debt, it may be a more pressing priority if you’ll soon have a much higher rate.

“In reality you may have paid off the wrong credit card,” he said.

Consumers using their tax refund to pay down credit card debt should also look for ways to improve their cash flow, said Andrea Blackwelder, a certified financial planner and a co-founder of Wisdom Wealth Strategies in Denver. Take a hard look at your budget and spending habits to avoid finding yourself in the same situation next year.

Consider adjusting your withholding to reduce your tax-time refund and keep more in your paycheck year-round, she said. That might help you avoid new debt and keep on track with paying down old debt.

“Part of what you have to focus on is how did I get there and how do I keep it from happening again?” she said.

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