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April 20, 2023 | By: Myles-Morgan Summers

5 Benefits of Paying Down Debt with Your Tax Refund

Debt Management | Taxes

When you receive your annual tax refund, the extra cash can feel like a reward. But what should you do with that money? Some might see this refund as an opportunity to buy themselves something nice or put some cash away for a rainy day.

But remember, this isn’t a cash windfall; it’s YOUR money that the government borrowed from you, so we recommend using it for needs versus wants. More specifically, consider using it to help pay down your debt.

The average Canadian tax return amount in 2023 is $2,072 and that money can go a long way when it comes to meeting your financial goals. Let’s dive deeper into why you might want to prioritize using your refund to alleviate your financial debt over buying something new or even investing it. 

Debt & Financial Stress

Looming debt can cause a lot of stress—taking a real toll on your emotional wellbeing. From student loan debt to credit card payments, the weight of your financial obligations can be an added stressor in your life. This feeling is normal, and making a plan to reduce your debt will help give you peace of mind and reach financial freedom sooner. 

To find financial freedom, it’s recommended that you make paying off your high-interest debt one of your first priorities. For example, credit card debt that has a 19% interest rate will continue to increase if you are unable to pay off that debt in full by the due date. Instead of immediately putting your tax refund into savings, it may be best to first reduce this interest.

Reasons to Use Your Tax Refund to Pay Off Debt

The extra cash from your tax refund can help advance your debt relief journey. With this money, you can alleviate your debt sooner while boosting your credit score and investing in your future. 

1. To Boost Your Credit Score

Using your tax refund to minimize the amount of credit you’re using can help to boost your credit score

Paying down your balances will help reduce the amount you owe versus your current credit limit—improving your credit utilization rate. This can provide a boost to your credit score, putting you in a better position to make important decisions regarding your lifestyle and your finances. 

2. To Save on Interest

The longer it takes to pay off debt, the more interest you’ll accumulate. Working to pay off debt sooner rather than later can save you money in the long run.

Debt repayment plans, such as the Avalanche Method, will put you in a better position to pay off your debt quickly while paying as little interest as possible. By targeting debts with the highest interest rates and working to resolve those first, you can pay less interest over time in comparison to other debt repayment methods. While this method requires some discipline, using your tax refund can help you knock off some of that debt faster. 

3. To Plan for Your Future

Using your tax refund to pay down debt will allow you to focus on saving money elsewhere and to plan for uncertain times. Debt repayment takes careful planning, but with a tax refund, you can relieve your debt sooner and allow for more time to put your earnings toward your future, such as retirement contributions or emergency savings funds. 

4. To Achieve Your Financial Goals

Contributing to your debt repayment plan will provide you with more flexibility to achieve your long-term financial goals. Using a budget plan, consider where your income is coming from and what expenses you should be prioritizing. 

With a strong debt relief plan in place, you can use your regular paycheques and other sources of income to help you move closer toward your goals. 

5. To Reduce Your Stress

As mentioned earlier, debt can be a serious stressor. Even though this is a very normal feeling, making slow contributions toward your debt repayment plan can help take some of the weight off your shoulders. With the finish line in sight, you can relax knowing you are making smart decisions to work toward your financial goals and ease some of the tension you might be feeling. 

What Are You Waiting For?

Keep in mind that even the smallest contribution toward paying down your debt can have a tremendous impact on your finances. Whether you are using a portion of your tax refund or the whole thing, any contributions will help you reap great long-term benefits. 

Credit Canada is here to provide you with money-saving tools as well as a team of experienced credit counsellors to help you regain financial freedom. From budget planning to financial advice, our team is here to see you through difficult financial times. Get in touch with Credit Canada today to start using your tax refund to achieve your financial goals!

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