You’ve worked all year and paid in your income tax to the Government on each paycheck. Now, for many of you, you will file your taxes with the expectations of getting that colorful Department of Revenue tax return in your mailbox! Now what? Shopping spree? Vacation money? If that’s your first thought, you are not alone. But ask yourself an honest question. Are you financially stable, do you have outstanding debt, do you have enough in savings to cover costs of an emergency? If the answer to any of these questions is “no,” then a shopping spree is probably not the best option for your tax return.
I know I sound like a thrill killer here. But here’s are some thoughts on how best to spend that tax return.
- Pay down your credit cards. According to FICO, the amount owed on your revolving trade lines (credit cards) makes up 30% of your scores calculation. That is almost 1/3 of your score. If you balances on your card are getting closer to the card’s limit, that’s not a good thing. Get those balances down to 10% or lower for your scores to improve organically. This will actually ease your monthly budget as well. You will have a little cash left over every month because your monthly payments to the credit card companies will be lower.
- Have you looked at your credit report lately? If not, with tax refund in hand, now is a great time to do it. Do you see collections on your report? Listen, a debt never goes away until it’s paid and settled. Caution Don’t just go and pay that collection! Use an expert to guide you through that process. Paying off an old collection can actually harm your score. The reason for this is the most weight given on an item on your credit report is the “date of last activity.” If you pay off a collection that is 4 years old, it will now state on your credit report that the item is now a “Paid collection.” Still a derogatory account with a zero balance, but you just updated the date of last activity. Now, the algorithms the bureaus use will see this as fresh derogatory account and LOWER your score. Always get in writing the item will be removed if paid or please seek an expert in this field.
- If your credit is great shape ….. save it! Most Financial Advisors state that the best practice is to have at least three to six months’ worth of money saved in case of unforeseen emergencies or unemployment. This has proven to be very difficult for most Americans. It’s reported that 42% of the population has less than $1,000 in savings. So, if you credit is in good shape and you need to work on your savings … deposit that tax refund for a rainy day.
But, hey, I’m a realist. And I have spent my refund before within weeks on things that I have later sold in one of my garage sales. So, allow yourself about 5% to 10% of that refund check just for you! After all, tax returns are merely what you allowed the Government to borrow, interest free, from your annual salary. But think hard on how to use your money wisely.
