Ask Jean: Should I use my tax refund to build savings or chip away at my credit card debt?

Saving money on ask jean should use does not have to be complicated. We rounded up the essentials so you can spend less and skip the guesswork.

Key Takeaways

• A reader asks HerMoney CEO Jean Chatzky: "“Should I use my tax refund to build savings or chip away at my credit card debt?”" Q: Today’s que...
• She writes: I’m trying to use my tax refund wisely.
• What’s a better financial move: Using my return to build up my savings and checking accounts?

A reader asks HerMoney CEO Jean Chatzky: "“Should I use my tax refund to build savings or chip away at my credit card debt?”"

Q: Today’s question comes from Chris. She writes: I’m trying to use my tax refund wisely. What’s a better financial move: Using my return to build up my savings and checking accounts? Or put my return towards my credit card with the lowest balance, which is about $5,000? I have two credit cards and the other has a balance of over $10,000.

A: I’m sure I don’t need to tell you that these days, credit card interest rates are sky-high, recently averaging about 24%. Ouch.

My advice to you would be to first compare the APRs on your credit cards. Then, use that refund to pay off the card with the highest APR, while continuing to make minimum payments on your other credit card. This is something known as the “avalanche method.” It will give you the biggest bang for each buck and help get you out of debt in the cheapest and fastest way possible.

You may also want to look into a balance transfer card, which can be a good option for paying off debt, as long as you know what you’re signing up for. This process involves moving your debt from your regular high-interest-rate credit card onto a card with a much lower rate (or even a rate of 0%) for a certain period of time , typically around a year. Note, though, numerous cards will charge a fee to complete the transfer.

If you go this route, your goal should be to pay off the entire balance by the end of that promotional period. Once the promotion expires, the interest rate will rise and might be even higher than the one on your original card. Then you’ll be charged that higher interest rate on whatever balance remains.

Before you sign up for a balance transfer card, be sure to read the fine print and take a hard, honest look at your current financial situation. Can you commit to paying off your balance during the promotional period? Will a 0% interest rate tempt you to add more to your debt? Compare different offers for balance transfers, and run some calculations on whether the fees and potentially higher interest rate will be worth it.

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Final Thoughts

Before you check out, double-check ask jean should use against current offers and any coupons you can stack. Small habits like this add up to real savings over a year.

Originally published at savingswitch.com.