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  • Debt and Taxes: Why That Refund Must Fix Your Credit

Debt and Taxes: Why That Refund Must Fix Your Credit

David Castillo
Monday, 08 January 2018 / Published in Credit Tips, money tips, Tax Returns

Debt and Taxes: Why That Refund Must Fix Your Credit

With tax seasons under way, everyone can’t wait to to spend their refund money like a lottery ticket. Despite our inner wishes, that tax refund is not a Victoria’s Secret gift certificate. If it is, you either haven’t had to worry about debt, or are about to start.

First, a quick refresher: a tax refund is basically just the number the IRS comes up with resulting from your tax liability (the raw amount you’re taxed), and taxes paid.

As we’ve discussed before, that tax liability is linked to the state you live – and each state has different points of emphasis, whether the heavy income tax from Oregon, or the significant tax rate on properties in Texas.

The net result? The average tax refund for American citizens has fluctuated in recent years. Recently that number has gone up: in 2004, the average tax refund was $2,100. The most recent number is $2,860. And the National Retail Federation survey shows that 39% of Americans plan to pay down their debt. So what’s the hold up? Why would 6 in 10 Americans go into debt because of a $500 emergency?

Part of this is has to do with psychology. When people are given that big tax refund check, it feels like found money. And we spend it like found money. The same psychology is at work when it comes to how we spend with credit cards versus how we spend with cash.

Spoiler: we’re willing to spend way more on credit.

One of the most famous scientific studies done at M.I.T. involved an auction on tickets to go see the Boston Celtics and the Boston Red Sex. Participants were then given the option of paying by credit card or cash. The result?

When credit cards were an option, the M.B.A. students offered to pay roughly twice as much as they were willing to hand over in cash for the same tickets.

Essentially, the sensation of loss is greater when using cash (probably since you can physically say hello or goodbye to it) versus credit. However, this is a credit world. And the biggest obstacle to is dealing with interest rates. Interest rates are those pesky charges you spend on but never see. For example, according to the Federal Reserve, the average interest rate on a credit card is 13 percent (!). That’s more than $500 on a $5,000 credit card balance for a single year.

However, interest rates are important for the overall economy; they’re what allow lenders to ensure that they’re letting people borrow money who can be trusted to make their payments, and be efficient consumers.  The best way to keep those interest rates low is to pay off debt. The most expensive items – such as homes and cars – have interest rates that add up over time. Any lingering debt will keep those interest rates high, and your wallet lighter as a result. Pay off that debt so that the next time you get that tax refund, it will feel like money earned rather than money simply found.

For a program that doesn’t just fix, and build, but that EDUCATES in order to make you a financial wizard like Adam and Logan (or so they wish), call us for a FREE credit evaluation at 210-520-0444 or visit us at 6989 Alamo Downs Pkwy, San Antonio, TX 78238. 

 

Tagged under: debt, taxes

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