Freedom Debt Relief Offers Best Ways To Use Tax Refunds To Get Out of Debt

The U.S. federal income tax filing deadline is April 18, and many taxpayers who filed early are already receiving income tax refunds. That makes this the right time for those individuals to make smart moves to get out of debt, said Kevin Gallegos, vice president of Freedom Debt Relief, LLC (FDR).

In 2008, the most recent information available, the average individual refund was nearly $3,000. Many surveys find that about half of U.S. taxpayers who receive an income tax refund spend the money immediately. Others are more prudent and save their refund. But what is the smartest way to use a tax refund?

Freedom Debt Relief analyzed several top choices and prioritized them as they apply to most taxpayers:

1. Close down payday loans. Few investments beat the rate of return for eliminating debt. For anyone carrying a payday loan, it will be the highest interest-rate debt they have. Often, a debt begins at just $100 to $300, but the interest and fees consumers pay on these loans can run into the triple digits every year. Therefore, if a consumer owes a payday lender, that is usually the No. 1 debt that they should pay off with a tax refund.

2. Pay down credit cards. Credit cards average an interest rate of about 15 percent or more per year. Therefore, paying off credit card debt is like making an investment that earns that much. The only caveat, Gallegos said, is that consumers must change their mindsets when they pay off that debt. "If you repay debts, but then go right back into debt again, you wind up at square one," Gallegos said. "Whether your refund can repay your debt completely, or make a big payment toward a large debt balance, promise yourself that you won't repeat your mistakes. Switch to cash to gain real debt relief."

3. Build an emergency fund. For those without major debt problems, a tax refund is instant savings, and can be used to start – or add to – an emergency fund. "It can feel great to jump-start savings," Gallegos said. "You can even have your tax refund deposited directly into a savings account. That way, you will not be tempted to spend the refund immediately, and can earmark the funds for emergency purposes."

4. Insure the home and family. Everyone should have health, auto, and home or renters insurance. If dependents rely on breadwinners' income, the heads of the household should look into life insurance. An umbrella policy is a relatively inexpensive way to protect from additional liability. And if the household could not survive without an income, purchase disability coverage.

5. Fund the future. Contribute to retirement savings, whether an individual or Roth IRA, 401(k) or other plan. If the program is tax-deductible, it helps next year's tax picture, too.

6. Get educated. Parents can put money toward a college savings plan for a child, or adults can strengthen their own financial future by continuing their education. A $3,000 tax refund would make significant headway toward an associate's degree, for instance. Associate's degree holders earn 23 percent higher salaries than high school graduates, and those who receive a bachelor's degree earn even more.

7. Invest in the home. "It is not every day that the average individual receives an extra $3,000," Gallegos said. "In that way, many U.S. taxpayers receive a gift each spring – and the wise person will use that gift to get out of debt and move ahead financially."