The 4 Most Financially Responsible Ways to Spend Your Tax Refund

Tax refund season was set up to be a Christmas for adults (don't fact-check that), which is great because all we really want as a gift is a lump of money anyway. But as great of a gift as it is, that money really needs to go to a good cause -- especially if you're on a financial mission to improve your credit or reduce your debt.

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Thankfully, millennial mom and chief consumer advocate at Credit Karma, Bethy Hardeman, could tell we'd be struggling with saving, and so she jumped in with her tips for getting the most long-term help from your tax refund.

  1. Pay down your debt. "Start by taking a look at your current interest rates on your credit cards and loans so you can focus on the highest rates," Hardeman says. "Most consumers will want to focus on credit card debt because the interest rates are often the highest."

    Hardeman says the average credit card APR is 14 percent, but store credit card APRs can be as high as 28.99 percent, so it's almost always good to tackle debts on those cards early.

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  2. Keep the windfall going. Hardeman says that if you use your extra cash to make another payment toward your student loans, mortgage, or car loan now, you could save thousands in the long run. 

    "Putting your refund towards paying down these large loans will reduce your interest payments over time," she says.

  3. Boost your credit score. Keeping credit card debt low is one of the best ways to improve your credit score, Hardeman says. That means putting your tax refund toward any outstanding credit card debt is basically like buying a better credit score.

    "Your credit utilization -- the amount of debt on your credit cards divided by the total of all your credit limits -- is one of the most influential credit score factors," she explains. "Try to keep your credit utilization below 30 percent, although less is better if you can afford it." 

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  4. Start an emergency fund. If you have any of your refund left over after paying off your debt, Hardeman recommends using that money to start an emergency fund. 

    "If something unexpected comes up, you won't need to put it on your credit card, which will reduce your chances of carrying a balance that you'll have to pay interest on," she says. 

It's so easy to shop or spend tax refunds on fun trips or experiences, and it's probably okay to use a piece of it toward that kind of thing. But you'll be happier in the long run if you're debt-free and flushed with good credit, so tuck your refund away this year and sleep better.

 

Image via iStock.com/DragonImages

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