Using your Tax Refund to Manage Credit Card Debt

– Some Americans are just about to get their tax refunds and wondering how they should use that to repay their multiple debt accounts Well, if you can't pay your debt at the end of every month, how should you decide to allocate that tax refund between all your credit cards? (uptempo music) Typically, the advice is that you should focus your repayments entirely on the account that has the highest interest rate

And yet, you might have heard, too, that, in some cases, you might be better off concentrating your repayments on the account that has the least amount of debt remaining The answer is that you should allocate the large payment to the small account The way that people judge progress across multiple accounts is actually pretty complicated It's not an easy thing to do And the way that people infer how much progress they're actually making is by judging the largest chunk of debt that they're actually cutting off from what you had left to pay

To illustrate, imagine that you have $125 to pay two cards You decide to put $100 in one, and 25 in the other If you pay a hundred bucks on 500, you cut 20% If you put a hundred bucks on a thousand, you cut 10%, and that's that number that people use then for progress Once you're motivated by all that progress you feel you've made, you might be more likely to end up saving more, applying your tax refund or maybe taking up that extra job, and that will allow you to get out of debt faster