Should you pay credit card debt with your tax refund?

Consumer credit card debt hit a record high at the end of 2024, passing $1.2 trillion for the first time in history. The climbing debt figures make sense in the context of the final months of 2024. Inflation rose for three straight months to end the year and holiday spending was up 4% year-over-year, according to the National Retail Federation. Also, credit card interest rates remained high, with the average rate hovering around 23%.

With credit card debt rising, the new year likely brought a renewed interest among consumers in ways to pay down credit card debt quickly, whether through various payoff strategies, debt consolidation or debt forgiveness. And with tax season in full swing, taxpayers receiving a tax refund are likely wondering if it's a good idea to use their refund to pay off some of their credit card debt. 

Answering that takes an understanding of how much credit card debt you have, how much control you have over that debt and what your overall financial picture looks like. But even with clarity in those areas, it isn't always easy to know if paying down your credit card balances with your tax refund is a good move.

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Should you pay credit card debt with your tax refund?

Using your tax refund to pay off your credit card debt depends on your financial circumstances.

When you should use your tax return to pay off your credit card debt

Here are two scenarios in which it could make sense to use your tax refund to pay down your credit card debt. 

When you have enough to pay it in full

Using your tax refund to pay off a credit card balance in full provides several advantages. First, eliminating an entire balance can provide a boost to your credit score, which is based, in part, on the ratio of your credit card balances to your credit card limits (utilization ratio). Paying off a card in full lowers that card's utilization ratio to 0% and lowers your overall utilization. If you can maintain that boost, your improved credit score may get you better interest rates in the future if you decide to, say, open a home equity line of credit (HELOC) or take out a home equity loan. For these reasons, it might make sense to use your refund to pay off a credit card balance entirely.

When your credit card debt has a high interest rate

There are several different ways to pay down credit card debt. One of those methods is to pay down cards with the highest interest rate first. When it comes to paying down credit card debt with your tax refund, it makes sense to target a high-interest credit card if it carries one of the highest rates of all your debt, not just your credit cards, says Marcus Sturdivant Sr., managing member at financial planning firm The ABC Squared. "If the credit card is one of your highest-interest payments and you can pivot to pay this off and no longer use the card, yes, pay it off," Sturdivant says. 

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When you shouldn't use your tax return to pay off your credit card debt

Here are two scenarios in which using your tax return to pay off your credit card debt may not be advantageous:

When it would only make a small dent

If you're carrying a high balance on your credit card — say $15,000 or $25,000 — then using a smaller tax refund to reduce your balance on that card may not be the best move. Not only will your balance remain high after you apply your refund to it, but you'll likely get very little breathing room in your monthly budget since your monthly payment probably won't change much. 

Additionally, if your card's balance is high because you've been using it to make routine payments each month, then your balance will likely increase back to what it was before you paid it down with your refund. If you're in this position, it may be best to use part of your refund to hire a professional to help you with your finances, Sturdivant says. 

"If you are not at a point to pay the debt with your refund and keep it eliminated, it may be prudent to take a portion of your refund and consult a professional to get your financial house in order and map out a plan, which should show the pros and cons of paying it off or using your refund toward another step in a holistic financial plan," he says. 

When debt relief services are more applicable

If you're facing six figures of credit card debt and there are signs that you're losing control of your finances, opting for a debt relief service may make more sense than using your tax refund to pay down a small portion of what you owe. 

By saving your tax refund and hiring a debt relief company, you can build up your emergency fund and get help from a professional firm experienced in negotiating with creditors to either lower your interest rates or get some of your debt forgiven — 30% to 50%, on average, provided you qualify for their services. In addition to their negotiations, debt relief companies can help you consolidate multiple credit card debt payments into a single payment, making it easier to keep track of your monthly bills.

The bottom line

In the right situation, using your tax refund to pay down credit card debt is a great idea. If you're managing your credit card debt well and aren't struggling to keep up with payments, it might make sense to use some of your refund to pay down your debt, then use the rest of the money to build an emergency fund, says Matt Schulz, a personal finance expert and author of "Ask Questions, Save Money, Make More." 

"I'd suggest putting some of [your refund] toward building emergency savings," Schulz says. "That's one key way to break the cycle of credit card debt so many people find themselves in. Without that emergency savings, what too often happens is that the next unexpected expense after you pay off your card debt just goes right back on the card."

Be smart about where you build that emergency fund, too. Putting a portion of your tax refund in a high-yield savings account can help you earn a solid return on your money at today's rates, Schulz says.