Tax Refund to Reduce Debt

"It's easy to treat a tax refund as found money and spend it on something fun or invest it with good intentions," says Paul Boyd, executive vice president of DebtXS.

The average refund check is $2,200 - $2,400. While investing this amount and using the return to make additional payments on credit cards seems like a good idea, Boyd says using the entire amount to pay off debt is a better long-term decision.

"If you compare the monthly payments and interest rates on credit card debt to a realistic return on an investment, it simply makes more sense to pay off the credit card debt first," Boyd said.

Making the minimum payments on $2,400 in credit card debt at 17.9 percent interest will take 14 - 33 years to pay off, Boyd says. A $2,400 investment made with the sole purpose to make the minimum monthly credit card payment would require a minimum 24 percent return.

According to Boyd, a better strategy would be to use the tax refund to reduce or eliminate debt, then take the minimum monthly payments you were making and invest them each month. In the same timeframe it would take to payoff the credit card with minimum monthly payments, consumers could gain $136,000 - $177,000.

"Obviously, most Americans have more than $2,400 in credit card debt, so tax refunds checks probably won’t eliminate most debt, but it can reduce that debt and the time it takes to pay it off ," Boyd said.

Famous Rhodes, executive vice president of DebtXS, suggests consumers make an adjustment in the amount of taxes that are being taken from each paycheck to free up more money on a monthly basis.

"A tax refund is an overpayment into the system, so you’re letting the government borrow money for a year without interest," says Rhodes. "Those funds could be better used for daily living expenses or making larger payments to reduce debt faster."

Rhodes says that consumers can ask their company payroll department to help make an adjustment to the amount of taxes being with-held from each paycheck. To calculate the adjustment, take the refund amount and divide it by 12.

About DebtXS
DebtXS is a recognized leader in the debt settlement/negotiation industry and was recently ranked number 17 on Entrepreneur magazine's Hot 100 list of the fastest-growing companies in the United States.

DebtXS was founded by Ken Talbert in 2002 after identifying a need for a company that would empower consumers with honorable alternatives to bankruptcy through the personalized and proven services of debt negotiation. DebtXS has grown exponentially and now has more than 120 employees, serving more than 12,000 clients and settling more than $3 million in consumer debt each month.

As the industry grows and matures, a steadfast approach will make certain that settlement/negotiation becomes a permanent option for the consumer who is burdened with debt and is facing financial hardship. DebtXS actively works with USOBA and other organizations to promote the debt settlement/negotiation industry, as well as to draft new standards and legislation to help consumers.