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Tax refund to your credit card?

By Janna Herron · Bankrate.com
Wednesday, April 11, 2012
Posted: 4 pm ET

There's a good chance more Americans will bring their credit cards into good standing in the short term, thanks to Uncle Sam.

The seasonal blip -- expected by many analysts -- comes as U.S. consumers use some or all of their tax refunds to pay off credit card balances. An analyst from Keefe, Bruyette and Woods expects credit card delinquencies to dip by two-tenths of a percentage point in March, largely due to the phenomenon.

Already, delinquencies are improving slightly more than expected by seasonal standards, he noted.

Discover said this week that its March delinquencies fell to 2.15 percent from 2.25 percent in February. The percentage of accounts it considered uncollectible also dropped to 2.64 percent in March from 2.8 percent the month before.

Even if Americans use their tax refunds to eat away at their credit card debt, it probably won't be enough. A new report released Wednesday from CreditKarma.com showed that the average U.S. consumer has $5,871 in credit card debt.

But for the last three years, the average tax refund totaled only $2,925, or just less than half the total average credit card debt.

Of course, that shouldn't dissuade you from using your tax refund as a means to cut your credit card bills. The best way to apply that extra cash is to put it toward the balance with the highest interest rate first. That's the rate that will balloon the fastest if an unpaid balance remains and rolls over from one month to the next.

But if you need instant gratification to keep you motivated to reduce debt, put the refund to the smallest balance first as a jump-off point. Then, move onto the larger balances, preferably the ones with the highest interest rates.

Once you chip away at your debt, look into balance transfer offers. That way, you can slash your credit card balance while paying no or a low interest rate.

Will you use your tax refund as a debt slayer?

Follow me on Twitter: @JannaHerron.

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1 Comment
NN
April 23, 2012 at 3:46 pm

Paying off my $9500 credit card debt even though the interest is 6.3 percent is a major relief. I am not interested in giving the banks any additional money.

Electronics depreciate and overtime. Rather live a stress free and debt free life. Take the shackles off my feet!!