A recent survey of taxpayers showed just 23% planned to use their income tax refund to pay off debt. Before the financial crisis of 2008, 55% earmarked their refunds for debt reduction.
"Paying down debt can undoubtedly be one of the best ways to put a tax refund to good use," Nick Bryan, Executive Vice President of OpenSky, a financial division of Capital Bank, N.A., said in a release.
Paying off, or paying down a large credit card balance not only reduces interest payments, it can raise a credit score, since the ratio of debt-to-credit is a major component of credit scores.
Bryan says one reason paying off credit card debt might not seem urgent is if you have a no-or-low interest credit card. In that case, it might make more sense to put the refund into savings.
When saving makes more sense
“It makes sense to do the numbers,” Bryan said. “You aren't losing money to let zero interest debt stay where it is for a while."
Putting the refund into savings provides a barrier against future debt. In nearly every month consumers are faced with unexpected expenses, whether it's a trip to the emergency room or an unexpected car repair.
Bryan suggests having what he calls a "life happens" savings account for emergencies. Otherwise, that unexpected expense will likely end up on a credit card balance, costing double-digit interest each month.
Homeowners with an adequate “life happens” account might consider making postponed but necessary repairs and upgrades to a home. Timely minor repairs head off major repairs later on, and can preserve and enhance home values.
Consumers are hardly flush
Economists, of course, hope taxpayers use their tax refunds to buy things, because that stimulates the economy. In past years, it was reasonable to expect that.
Things are a little different now. Personal income has barely risen in the years since the last recession. Lower gasoline prices have given consumers a little breathing room, but they are hardly flush.
A recent survey from GoBankingRates.com also shows a lower rate for using tax refunds to pay down debt, but it also showed little inclination for consumers to go shopping. Only 5% plan to make a major purchase and only 4% planned to splurge on something like shoes or a new TV.