Should I Use My Tax Refund to Paydown Debt?

Congratulations on receiving a refund this year and considering using it to pay down debt. There are key factors at play that may not be correlated with our current interest rate-sensitive environment. Lately, the FOMC has been evaluating dropping interest rates, and that can affect loans that have variable interest rates, such as credit cards. Let’s identify your situation and move forward with the best option for you.

First, are you behind on any payments? If so, it's in your best interest to pay those now so that your credit history isn't negatively impacted. However, if you're not behind and you have a plan in place to pay them down, it might not be in your best interest. It's probably not what you'd expect to hear, but instead of evaluating your debt through the lens of interest rates or balances, evaluate it through your behavioral spending.

If you notice at the end of the year that the balances on that debt are growing instead of shrinking, you should put your money towards the account that is the "easiest win" or would make the most impact on your everyday life. That could mean getting rid of a balance or reducing interest. This mindset shift begins to establish that you are not defined by your debt and that you can overcome it.

In a perfect scenario, you'd pay down debt with the highest fixed interest rate. Variable interest rates during a time of interest rate cuts are not the top priority, but they are during interest rate increases, as we've seen over the last two years. Next, pay down account balances, taking on small wins before tackling larger ones. The last thing you should pay down is lifetime debt. I would have a hard time justifying paying that down at this time since you could potentially earn more money in the market. A balance of taking care of your future and improving your current situation needs to be struck.
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Debt mindset varies for each person, but with the right tools and guidance to make informed decisions, you can leave some on the table and plan for a better future.

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