Smart Ways to Use Your Tax Refund to Pay Off Debt

Updated on September 25, 2023

What a nice change in fortune it is when the government owes you money! You, hopefully, pay your taxes with diligence and sometimes you end up paying more than you have to. In such a case you get a welcome tax refund from the government. But what do you do with that refund? It is after all your money, so where do you put it to use?

Some would say you should use a tax refund to pay off debt. And that will serve you well if you do have debt but it’s not the only option you have. You could use your tax refunds in many different ways which we’ll take a look at below. Go through the tips provided here to find the best use for your refund.

Using Your Tax Refund to Pay Off Credit Card Debt

Credit cards help you get out of a jam. You get immediate access to a sum of money with the convenience of repaying it over time. But credit card interest rates are unfortunately not that convenient. They can be really high which leads to expensive credit card installments. So what can you do about credit cards?

You can use your tax refund to pay off credit card debt. You receive an amount of money in your refund which you didn’t exactly save up. It’s not like you depend on that money according to your budget. You got it “for free” from the government, totally unplanned. Why don’t you put it to good use and pay off credit card debt?

But which credit card do you pay off first if you have more than one? Do you know the interest rates applicable to each of your cards? If not, it’s a good time to familiarize yourself with it. Look for the card with the highest interest rate which mathematically has the most expensive installments and pay off that card first. This will save you lots of interest repayments and help you repay your other debts much faster.

Other Debts to Put Your Refund Toward

Everyone who works in the U.S. is subject to some form of tax. Even L1 visa taxes are required from some types of immigrant workers. Credit cards are indeed a popular form of debt in the U.S. but it’s not the only type. A tax refund can help settle other types of debt as well. Let’s see which other types of debt can also be reduced if you use your tax refund to pay off debt.

Student Loans

The average student debt in the U.S. during 2017 stood at $37,172. Student debt quickly accrues interest and even more so if you have student debt in that range. Your student debt perhaps helped you graduate, but it sure doesn’t guarantee a job. You still need to go find your source of income. In the meantime, you are required to settle your student loan with monthly installments which could take years to do successfully.

But get a tax refund and you get an immediate advantage. You can pay that whole refund amount towards student debt which could relieve quite a load of pressure. It not only helps to reduce the number of repayments required but it also reduces the principal loan amount. A lowered principal amount reduces the effect of interest. You’ll have less interest to repay over the lifetime of the debt. You can reduce many payments by using your tax refund to pay off student debt.

Car Loans

A car loan helps you get a vehicle when you don’t yet have the money required to buy it cash. It’s a wonderful way to get a car when you really need it, but it comes at a cost. Car loans have interest rates and it could land you in a pickle if you don’t manage it well.

You can use a tax refund to pay off car loan debt too. Just like the previously mentioned examples, applying your extra income to pay off debt will help you, in the long run, save on interest. This may help you settle the debt much faster than you would have if you hadn’t spent your refund on debt repayments.


One of the cornerstone debt products of our time. The mortgage helps millions of Americans and immigrants to own their piece of the American Dream. Though it’s interest rates are much lower than compared to other types of debt, it still requires repayment. The value of your home may increase over time according to market movements, but so does your mortgage accrue interest if you don’t repay it.

A tax refund could help you settle your mortgage in fewer payments. Use your tax refund to pay off your mortgage debt and you will save thousands in interest in the years to follow (considering you have a few more years of repayment remaining on your mortgage).

So we’ve had an extensive look at debt settlement uses for tax refunds. Are there any other applications available for a tax refund? Let’s show you a few.

Proactive Uses for Your Refund

You must be proactive with H1B taxes. Just so with planning your financial future. Financial freedom comes mainly to those who plan for it and act proactively. Few people (if any) regret financial freedom, but it requires a measured and decisive approach to gain it. Here are a few ways in which you can use your tax refund proactively to increase your financial wealth.

Plan for Retirement

You hopefully have a budget in some shape form or size which helps you steward your finances monthly. With it, you plan how much you spend on each of your necessities and if you deem it a priority you’ll also be saving a portion of your salary towards retirement. You’ll also plan to pay your independent contractor taxes if you are one.

The money you receive out of a tax refund is largely unplanned. You didn’t bargain on getting a refund and this makes the amount a useful sum of cash. You can use it to increase your retirement savings rather than spend it on things you don’t need, like expensive clothing.

Start an Emergency Fund

Life happens unexpectedly and when it does we tend to be ill-prepared for it. Your car breaks down, the thermostat stops working, or something else of real importance is faulty and needs to be replaced soon. How do you solve the problem if you don’t have cash? People usually turn to credit cards that have interest rates. But if you started an emergency fund before the challenge arose, you would have had some cash to work with.

Use your tax refund as an emergency fund. Keep it in a fairly cash liquid form like a savings account or extremely liquid form of investment which you can sell fast. This cash can help you to cover emergency expenses and costs. 

Save for a College Tuition

Perhaps you’re planning on raising a family and you’re also already making provisions for your children’s college education. Any tax refunds you get could go directly towards savings for their tuition fees. Maybe you even want to finance your own education. Use your tax refund in both these cases to finance the planned tuition fees.

5 Questions to Ask Before Paying Off Credit Cards with Your Refund

It’s tough repaying debt with expensive interest rates and credit cards fall in that same category. But before you put all your tax refund earnings into credit card debt, first ask yourself these 5 questions to note if you don’t perhaps have more pressing issues than mere credit card debt.

1. Do You Have an Emergency Fund? 

Do you have a decent amount of money ready to help cover emergency expenses? Credit card debt is important to settle within the required timeframe. But proper healthcare treatment is only available when you can pay for it. And you don’t want to be caught unprepared when a life is on the line.

2. What is Your Debt Costing You? 

Do you know what amount of interest you are currently repaying per year? Have you checked the amount of interest your debt accrue annually? Before you just pay something without thinking, first check to see which of your debts are the most expensive (has the highest interest rates). Pay those debts first to reduce the impact it has on your financial wealth.

3. Is Your Credit Card Maxed Out?

A credit score has a direct impact on your creditworthiness. Maxed out credit cards decreases your credit score. This will hurt your ability to apply for new credit. Any applications you take now will have more expensive interest rates involved because of your decreased credit score. A tax refund may be handy when you want to repay maxed out credit cards. It will improve your creditworthiness now and possibly your financial wealth in the future as well.

4. Which Card Should Get Paid Off First?

Check your credit card statements and note which card has the highest APR. The cards with higher interest rates accrue the most interest. These are the cards you most probably want to pay off first. These cards accrue interest faster and faster if left unchecked.

5. How Are You Going to Stop the Credit Card Debt Cycle?

People often get credit cards to finance their shortage of cash for short term expenses. It helps to make ends meet when you are still waiting for a paycheck to arrive and helps cover costs you didn’t plan for. But this cycle will continue if you don’t put a stop to it. It’s easy to get another credit card if your credit score allows for it. But soon you may land yourself in trouble if you don’t stop the cycle.

Plan to stop the credit card debt cycle in your own life by budgeting appropriately. Only spend your hard-earned cash on the things you need. Save some money for debt repayment and also save some for retirement if possible. Then plan to use any additional income like tax refunds to repay your debt.


Debt could serve as a powerful tool in your hand. It grants you access to purchases and projects you would never have had if it weren’t for credit. But over-borrowing can happen all too easily and getting out of it is unfortunately not that easy. So what can you do about it?

If you get tax refunds you need to spend that money wisely. Use your tax refund to pay off debt. It helps you save on the overall interest that accrues and it also helps you repay your debt much faster. Perhaps you need something other than debt repayments. See the tips provided above to guide you towards your best way to use your tax refund.

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Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.