Debt

Ask Jean Tuesday: Let’s Talk About Tax Returns

Posted by Jean

“I am going to get about $3500 as a tax return. I want to buy a CD at the bank for $1000 and try to pay some of the credit cards debt I have. I have about $13,000.00 in credit card debt outstanding. I also have 3 store cards and 1 credit card that are in good standing but maxed out. What should I do?”
– Annette, Pennsylvania

Once you have your emergency cushion in place, paying down credit card debt is a terrific use for your tax refund.  (If you don’t have that emergency cushion, put the $1,000 in a money market where you can access it if you need it rather than in a CD.)  Take a look at the interest rates on the cards you’re carrying.  Use the money to completely pay off (if you can) the card with the highest rate of interest. If it will cover more than that, apply the excess to the card with the next highest rate of interest.  It will probably be one of those store cards – they’re known for having very high rates.  Continue paying the debt off in interest rate order until it’s gone.  And here’s what I want you to do next: Change your withholding.  Instead of a $3,500 refund next year, I want you to get an extra $291 a month in pay.  Use that money to pay down those credit cards in real time and you’ll see the debt vanish faster.  And once it’s gone, funnel the same $291 a month into a Roth IRA where you can use it to build a nice cushion for retirement.  Lastly, as for that CD.  Rates are pretty meager right now, but find the best CD you can by comparing rates at bankrate.com.