Should you use your stimulus check to pay down credit card debt?

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Who doesn’t love free money? The stimulus checks certainly have that feel regardless of whether they really are or not. The question is, what’s the best way to use this money? Let’s dive in.

First off, if you are among the millions of Americans who have lost their job due to the ongoing COVID-19 pandemic, this money first and foremost should help you meet the immediate needs of you and your family. Having a roof over your head and food on your table is crucial, and the stimulus checks have been and continue to be a much-needed lifeline for those in need.

But if you have been able to continue working or have enough money saved to meet your basic needs, you can reap some different benefits from the stimulus money. Here are a few ideas.

This money could help you save on interest payments

If you are carrying high-interest debt on credit cards, use the money to make a dent in those bills. This could make a big difference in how much interest you end up paying. While putting it in a savings or checking account would yield next to nothing in interest, paying down high-interest debt could save you a significant amount. Try out this calculator to see the impact your stimulus check can have to help get you out of debt quicker.

It is also worth noting that even if your interest rate is not higher than average, you would still benefit from paying down those balances or paying them off completely. Carrying credit card debt weakens your overall financial position and exposes you to unforeseen financial emergencies. I like to think of debt as a heavy package you have to carry that can throw you off balance. A bump that would ordinarily be hardly noticeable to you can more easily knock you off your feet.

How could this boost your credit score? 

Credit utilization (how much of your available credit you use) is an important part of your credit score. For your FICO score, it is worth 30 percent of your score, and it is rated “extremely influential” to your VantageScore. Reducing your credit line utilization can help your score almost immediately. This is especially true if you are carrying 30 percent or more of your credit line as a balance on your current credit cards.

If you can get below 25 percent by using your stimulus to pay those cards down, you will see a score boost. The boost can be particularly strong for those new to credit or with a lighter credit history. Remember that people with the very best scores have utilization percentages in the single digits (or even zero). So using your stimulus check to get you to that point is going to help your credit score, especially if  you can keep your utilization down long-term. You won’t do yourself a lot of good if you go right back to charging more to your cards than you can pay back once you get them paid down.

Is there a better use for this money? 

For people who are not in dire financial straits, I suggest dividing the money anytime you get an unexpected windfall. This would include your stimulus check, but also bonuses, raises, refunds and any other unexpected money you might get.

Take the first half of this money to establish or build up your emergency savings fund. If you don’t have one, this is a great opportunity to start it. If you do have one, adding this money can help you get it fully funded. “Fully funded” in my mind is somewhere between six months to a year of living expenses. Times being what they are, a few more months wouldn’t be a bad idea either.

The remaining half is yours to enjoy. I suggest that you continue to employ this system when you get other windfalls like a tax refund, a raise at work and even birthday money. Most of us need to take a break from saving and planning all the time. Spending half of an unexpected windfall on something you want now can provide just that respite you need and allow you to remain focused on your long-term plan.

Good luck!

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