How to Use a Refund to Pay Down a Debt

Taxpayers with credit card debt or other loan obligations may opt to use their federal tax refund to amortize part of their total debt. In order to maximize the effectiveness of using a refund to pay down debt(s), taxpayers receiving refunds should look at every account they hold and select the smallest accounts that can be simultaneously paid off as this strategy will allow a greater portion of income to be dedicated to paying off the next-highest debt.

Instructions

1

Identify the smallest debts owed. List on a spreadsheet or sheet of paper all debts owed, from smallest to largest. Using the amount of the refund, begin with the smallest debt owed and add in the next highest debt until it equals the full amount of the refund.

2

Contact the account servicer. The balances listed on the latest statement may not accurately reflect interest that has accrued. As a result, mailing a check or making an online payment that is equal to the amount in the last billing statement or online register could be insufficient for paying off the debt in its entirety. Cardholders should contact their credit card company or loan servicer and ask for a payoff amount and payoff window or for a time frame to be sent via e-mail or by mail.

3

Write out the check(s) to pay off the debt(s). Whether paying off one or multiple debts with your refund, write out separate checks and include the payoff statement you received from the credit card company or loan provider. In instances of paying off old debts settled for less than the amount owed, use only a money order or certified check so as not to disclose your bank's routing number and your personal account number. As a precaution, mail the checks two to three business days in advance so they will arrive before the end of the scheduled payoff date.

4

Order copies of your credit reports 45 days to 60 days after paying off the debt(s). Allow 45 to 60 days from the payoff day to pass, and then order a copy of your credit report from each of the three credit bureaus. By federal law, consumers are allowed to request one free copy from each credit reporting agency once a year.

5

Review all three credit reports to ensure the debt(s) are entered or marked as paid. If you have closed the account(s) in conjunction with paying them off, be sure the credit reports indicate the card is paid and closed. Entries will read "closed account, paid in full" or "account closed, paid as agreed."