An income tax refund can never come at a bad time. The only hard thing about getting "free" money is deciding how to spend it. You could always blow it on some gadget you'll forget about in a month. Or, you can spend your tax refund on something that will benefit you in the long run - like, your finances. If you're due a refund, here are some smart ways to spend it that will improve your credit and reduce your debt.
Putting your refund away for a rainy day is a wise decision. It keeps you from having to use your credit card when you face a financial emergency. Since so many debt situations stem from unexpected expenses, starting an emergency fund will give you some of the protection you need to ward off debt. Without a lump sum to jumpstart your emergency fund, it could take you months to set aside enough money for your emergency fund.
Tired of late notices and debt collector phone calls? Avoiding them doesn't make them go away; it simply prolongs the collection process and damages your credit in the process. Use your tax refund to take care of those late bills. Your credit score will thank you and you'll thank yourself for finally getting rid of annoying collectors.
What do you do when you have an emergency fund and you're current on all your bills? Bring your debt level down by paying off your credit cards. You'll likely see an increase in your credit score and relief in your wallet.
Pay off a cash advance or payday loan.
Many people who borrow payday loans can't afford to repay the loan from their regular bi-weekly or monthly pay. Instead of rolling the loan over and paying more fees, get rid of it once and for all with your tax refund. If there's money leftover, start that emergency fund so you don't have to borrow a payday loan again.
Make an extra loan payment.
If you have a mortgage or auto loan, each extra payment you make reduces the life of the loan and the amount you pay in interest. Overall, you'll end up paying less than if you hadn't made any extra payments. Make sure you indicate that the extra payment is for the principle on the loan. Otherwise, the payment would be applied to your future payment, reducing both the principle and interest and accelerating your payment due date.
Unpaid collections are one of the worst things for your credit score. As long as your collection remains unpaid, you'll have a hard time getting approved for new credit cards and loans. A paid collection won't necessarily boost your credit score, but it will make it easier to get new applications approved.
Treat yourself, but don't overdo it.
How fun would life be if you only spent your money on bills? It's ok to spend money leisurely, but remember, there's a balance. The key is to take care of your responsibilities first, then enjoy your money second. Before you spend a dime of your tax refund, make a plan for how you're going to spend the money. For example, you might put 80% of it toward your debt and other finances and spend 20% on yourself.