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EQUITY Responds: WID Answers Your Questions
Q: I just received a nearly $2,000 tax refund, thanks to both the Earned Income Tax Credit and the Child Tax Credit—those things really add up! I'm not sure what the best thing to do with my money is. I thought of saving it for a “rainy day” fund, but I receive SSI and I don't want to mess up my benefits. I also thought of spending it on a trip, but I'm trying to be more responsible with money. I also thought of using it to pay off some of my credit card debt. What would be the best thing to do with this money to really get me going on the right track?
Congratulations on the windfall, and more importantly, choosing to make a smart decision with your money.
For most people, the best investment is getting rid of bad debt. With credit card rates on the rise, anyone with outstanding balances on cards will want to pay them down as quickly as possible. You didn't mention how much accumulated credit card debt you have in total, but using your tax return as a starting point, let’s look at the potential savings of paying down debt.
If you have a 15% interest rate, using a $2,000 tax refund to pay down credit card debt not only gets you closer to a debt-free balance sheet, but also saves you $300 per year in interest. That's a reward you can't afford to pass up.
If you have other credit card debt, make a plan to pay it off as soon as possible. There are many credit card calculators that can help with figuring out your options.Check out the Federal Reserve's Credit Card Repayment Calculator at http://www.federalreserve.gov/creditcardcalculator/. We particularly like this tool, because it allows the user to model various repayment scenarios.
Simply enter your credit card balance and APR to determine how long it will take to pay off your balance by making only the minimum payment. For example, with a $2,000 credit card balance, at 18%, making only the minimum payment of $40 per month, it will take 19 years to pay off your credit card and you will pay $3,863 in interest charges. However, if you were to up your minimum payment to $100 per month, you would pay off your $2,000 balance in two years, paying only $397 in interest charges.
This is an illustration of why it is so important to make more than the minimum payments on credit card debt. Be careful however, many of the calculators and websites are only industry fronts to push credit cards. Stick with the Federal Reserve site or other trusted institutions when conducting research and analysis.
Congratulations on the windfall, and more importantly, choosing to make a smart decision with your money.
For most people, the best investment is getting rid of bad debt. With credit card rates on the rise, anyone with outstanding balances on cards will want to pay them down as quickly as possible. You didn't mention how much accumulated credit card debt you have in total, but using your tax return as a starting point, let’s look at the potential savings of paying down debt.
If you have a 15% interest rate, using a $2,000 tax refund to pay down credit card debt not only gets you closer to a debt-free balance sheet, but also saves you $300 per year in interest. That's a reward you can't afford to pass up.
If you have other credit card debt, make a plan to pay it off as soon as possible. There are many credit card calculators that can help with figuring out your options.Check out the Federal Reserve's Credit Card Repayment Calculator at http://www.federalreserve.gov/creditcardcalculator/. We particularly like this tool, because it allows the user to model various repayment scenarios.
Simply enter your credit card balance and APR to determine how long it will take to pay off your balance by making only the minimum payment. For example, with a $2,000 credit card balance, at 18%, making only the minimum payment of $40 per month, it will take 19 years to pay off your credit card and you will pay $3,863 in interest charges. However, if you were to up your minimum payment to $100 per month, you would pay off your $2,000 balance in two years, paying only $397 in interest charges.
This is an illustration of why it is so important to make more than the minimum payments on credit card debt. Be careful however, many of the calculators and websites are only industry fronts to push credit cards. Stick with the Federal Reserve site or other trusted institutions when conducting research and analysis.