If you are someone who has been struggling with debts, it is highly likely that you are also often trying to find methods of reducing your bad debt and improving your credit score. Well, fortunately one avenue you can look at for lowering your debt is to consider using your upcoming tax refund to pay a large portion of it off.
Now if this sounds like an outcome you have been hoping for and you have an idea how much you expect to receive from your tax refund, the next step will be to select which debt you will pay down. With multiple debt concerns, it may be that you will need to decide which ones you will choose to target first and here are some suggestions to get you started.
3 ways you can use your tax refund to reduce your own personal debt include:
1) Pay off Outstanding Bills
First on your list of debt concerns may begin with the outstanding bills that have been piling up. If this is the case, then with an upcoming tax refund on the way you can find yourself in a truly fortunate position.
With outstanding bills not only adding to a larger accumulation of debt, with over due payments occurring this also negatively impacts your credit history, leading to lower credit score. Since payment history is responsible for a large percentage of your credit score, by getting all of your payments up to date and moving into a more stable financial position, you can start rebuilding your credit and your tax refund can be play a huge role in your success in this area.
2) Pay off Credit Card Debt
Another bad credit woe that may also be plaguing you is the presence of a high volume of credit card debt. Again, this form of debt can be quite daunting as it can quickly add up and interest charges can become very hight as well. However that being said, if you can use all of your tax refund or at least a large portion of it, you have the potential to reduce your credit card debt quite dramatically.
If you have high credit card balances, it may be that you are currently also only able to make minimum balance payments each month. While this is still a good method of maintaining a solid payment history, it doesn’t really do much for paying down the actual credit card amount. Using your tax refund can do wonders however for paying down your actual credit card balance and ultimately lowering the amount of interest you will be paying over time.
3) Make a Lump Sum Mortgage Payment
Last but not least, if you are a home loan borrower, you may also want to consider using your tax refund to help lower the overall size of your mortgage. As there are often restriction on how often you can make mortgage payments and since making too many or making payments too early can mean you will be faced with additional penalty charges, you will of course need to stick within the parameters of your home loan terms.
Typically however, many mortgage agreements do allow borrowers to make an additional payment once a year, for example. If this matches up time wise with the arrival of your tax refund you can use this money to make a lump sum payment towards your mortgage. Again, this lump sum will reduce your overall mortgage size and the interest charges you will pay over the course of your mortgage term.
As you are paying down your principle mortgage balance with your tax refund, you can lower the total amount of your mortgage, in turn decreasing the length of time it will take you to pay off your loan in its entirety.
Since interest and various different debt areas can really creep up on you, coming up with a method of relieving these growing amounts will be extremely important. Therefore, you can counteract these growing debts by making a lump sum payment off of whichever debts are the most detrimental to your financial health.
Whether you are choosing to target your outstanding bills, your credit card debt, your mortgage or possibly even all of the above – in the end, if it is your goal to pay down your debt, then the tax refund you will receive this year can definitely help you achieve this financial milestone and in 2016 you can breathe a sigh of relief as your debts have been stopped in their tracks.
