Many of us aren’t quite sure what, if anything, we can expect in the line of a state or federal income tax refund this year – and really, do the experts even know for sure at this point?
It’s all quite confusing and toss in the fiscal cliff confusion and ultimate last minute fix by our nation’s leaders to the equation and it’s little wonder many of us are panicking. Still, there’s going to be plenty of folks who find themselves receiving a refund instead of a tax bill and while most of us can easily justify taking a weekend trip (after all, many haven’t had vacations at all since the recession), we have a few reasons as to why paying down credit card debt could ultimately mean even more vacations in the future.
How You See it
All the experts agree – it all comes down to how you view your refund. If you approach it as money that’s going to be earmarked to pay down debt, instead of money that’s going to get you out of town for a few days, you have a much better chance of actually using it to pay down your credit card balances or apply towards your mortgage. If that’s just too challenging, why not make up your mind to use, say, 10% of it for your “mad money” and apply the rest of it to your debt? That way, you’re still getting your financial bases covered, but you’ve also stashed a few dollars for something indulgent – and you’re like many of us, “indulgence” is subjective.
I can’t think of anything more indulgent than a Saturday afternoon at the apple orchard two counties over,
said one of our editors. If, however, your idea of indulgent is a 10 week cruise around the world, you might want to rethink it – especially if your 10% wouldn’t cover an autographed photo of the ship’s crew.
As you’re paying down debt, remember that what you’re paying now means you’re not paying more later. For instance, if you have a $2000 balance on your Visa, if you pay the balance in full now, that’s hundreds of dollars in interest you’re not paying later this year, next year or over the course of several years. You’re actually putting more money in the bank if you can approach credit card debt the way it was meant to be – a convenience to be used as long as you can afford to pay it off each and every month. If you don’t have to pay interest, you’re only doing yourself a huge disservice if you do so anyway. Be honest with yourself, too. What are the odds of you having another nice little chunk of extra cash over the next twelve months? Better to take advantage of it now than hope for a yearly bonus at the end of the year.
Rising Interest Rates
There’s another reason why paying down your credit card debt is so crucial: rising interest rates. Anytime you can eliminate any kind of uncertainty in any aspect of your life, it’s going to mean a lot more peace in the long run. Bank fees are on the rise, too. Three years ago, the average late payment for credit card hovered around $29. Now, they’re hovering near the $40 mark – and that could go even higher.
The less money you owe, the better your credit rating. That alone is a fine reason to use your refund for debt. Did you know that only one third of Americans say they are saving any money each month? Close to half of all Americas are dipping into their emergency savings to cover daily living expenses. This, according to a new Capital One survey, tells the tale – and it’s not one of improving financial circumstances for millions of Americans.
A full 54 percent of taxpayers will be using their refunds to pay down their debt. In 2008 (just before the recession), only 35 percent of taxpayers were planning to do so. In 2004, not even a quarter of Americans used their income tax refunds to pay down any kind of debt at all. It’s clear our collective mindsets have shifted. To give you a better idea of just how important it is to pay down debt, consider these 2012 statistics from a joint effort that includes the Federal Reserve, Joint Economic Committee, Sallie Mae and TransUnion:
- Total U.S. credit card debt: $793.1 Billion
- Average credit card debt per household: $15,799
- Average household debt: $54,000
- Percent of consumers that carried an unpaid balance in the past 12 months: 56%
- Percent who said their debt had gotten “higher” in the past 12 months: 26%
- The average balance per open credit card: $1,157
- Percent of disposable income that went to service credit card debt: 13.9%
- Percent of families whose debt exceeds 40% of their income: 14.7%
- Average combined credit card limit per consumer: $19,000
- Average debt of a college graduate: $20,000
- Percent of 18 to 24 year-olds who have “debt hardships”: 20%
- Percent of college students who have credit cards: 76%
The fact is, despite the assurances from everyone from the President down to the local community bank president, there are few significant and definitive signs that the economy is improving. For every positive news reported by the media, its competition is reporting just the opposite. With so many inconsistencies from the American media, most Americans are leaning more towards trusting their own family’s hard numbers. A full 90% of Americans say their debt has not dropped in the past twelve months. That’s huge! Worse, it’s indicative of how the current economy is still holding millions of Americans back. Anything you can do to insulate yourself and your family from these harsh realities will be like a breath of fresh air. Besides, who wants to go on a cruise when they’re worried about how they’re going to cover the bills when they get home? Wouldn’t it be so much more relaxing if you put it off for awhile, paid down some debt and put a little money into your emergency savings before you board the cruise ship? It’s human nature. A vacation is only as relaxing as the mind is free from worry.