Experts say the smart way to spend your tax refund check is by paying off credit card debt and building up a savings account to help improve your credit score. It’s tempting to think about buying that bigscreen TV or even getting a swimming pool installed — but a rush to spend your income tax refund can erode the value of the refund, said Carol Young, Kansas State University Research and Extension financial management specialist.
If you are like many Americans, you may be in a rush to get your tax refund check — but a refund anticipation loan is not always a good idea. “If you need quick cash, arranging a short-term loan with a financial service provider usually is less costly than a refund anticipation loan, which typically has a higher interest rate and loan processing fee or fees,” Young said.
“Simply put, a refund anticipation loan requires a taxpayer to pay a hefty interest rate to borrow his or her own money for a relatively short time, sometimes two weeks or less.”
How to get your tax refund sooner
Filing your tax return early, rather than waiting until a day or two before the annual April 15 deadline, filing electronically and/or opting for direct deposit can minimize the waiting time for a refund.
“Use the waiting time to plan how you can use your tax refund to improve your financial situation,” said Young, who advised paying down debts with the higher interest rates first. If you owe $2,000 on a credit card charging 18 percent interest and pay $50 a month, it will take five years to eliminate the debt. The interest due — $1,077 — adds up to more than 50 percent of the original debt.
If, however, you use a $1,000 tax refund to pay down the debt and continue to pay $50 a month to clear the remaining $1,000 balance in two years, you’ll save $879 in interest.