If you’re going to receive a big tax refund this year, chances are you’re already thinking of how to use it. Well, we’ve got a suggestion for that lump sum: Pay down your debt. While it might be more exciting to use your refund to take a vacation or buy something, here are some of the benefits to digging out of debt.
You’ll Cut Down Interest
Using your refund to pay down your debt will allow you to save on interest. If you have high interest rate debt, on a credit card for example, you could save a ton. As Market Watch notes, let’s say you have a credit card with a $5,000 balance and 18.9 percent interest. If you pay $200 per month, it’ll take you 137 months to pay off the card, at a total of $8,109. Now, let’s say you use your $1,200 refund to pay down the balance. If you keep paying about $200 per month, you’ll now pay off the card in 90 months, at a total of $5,432. That’s a savings of $2,677.
You’ll Improve Your Credit Score
Paying down your debt can also help you improve your credit score. A key part of your score is your credit utilization — the percentage of total credit you’re using at any given time. If you decrease your debt, you decrease your utilization, which in turn increases your score. The higher your credit score, the easier your financial life will be. You’ll get better offers on mortgages, car loans, personal loans and credit cards.
You’ll Free Up Money
Sinking money into debt can be deflating, so digging out of that hole faster will help you feel better overall. Once you have lower (or zero) debt, you’ll have money to increase your savings, plan that vacation and more.