Cut Credit Debt At Tax Time

As tax time begins and people start filing returns, hoping for a nice tax refund, some of the financially smart are thinking about how their debts could also do with a boost.

This year’s Bankwest “Taxing Time” Survey indicates that the average tax refund for the 2010-2011 tax year is expected to be $2,317 across the country, with close to half of the people surveyed planning on using this money to pay off debt.

Before making a decision using your tax refund, the important thing is to have a good understanding of the different ways a tax refund could fit into credit debt payments.

Get Rid Of Credit Debt With A Lump Payment

Using your tax refund as a lump payment to clear credit debt is a great option because it means you will not have to worry about that debt again and can focus on staying debt free for good.

But before you decide to go ahead with this option, compare the tax refund amount with the total balance of all credit card debts. Some people may only get $100 or less back on their tax, which probably will not clear a debt and could be used in another way instead.

Using A Tax Refund To Reduce Overall Credit Debt

If the debt is too big to be paid off in one go, some people may still be tempted to reduce the amount of debt by using all of the tax refund in one go.

This could make a big difference for some debts, like a $3000 debt that then becomes a $1000 debt, making it easier to pay off and cutting down on accumulating interest.

But this method may not be so great for people with larger debts or those dealing with high interest rates because it could still leave them with difficult repayments and a debt that will build up again. If that is the case another option could be considered.

Gradual Repayments And Tax Refunds

For larger debts, finding a repayment plan that is manageable is ideal. If you are not currently meeting the required repayment amount each month, consider using your tax refund to gradually increase repayments so that you do not end up back at step one every month.

To make a real difference to the debt, consider a balance transfer to a lower interest card so that the debt does not increase as quickly.

For larger debts a tax refund may not be able to immediately help, but putting it into a good savings account and using it as a store for repayments may just be the thing you need to clear credit debt over time.

What ever the situation, there are a range of options that can be considered to help make your tax refund reduce credit debt and stress.