Should I invest my tax refund or pay off credit card debt?

Question

Ok - my tax refund this year is ~$1200. I'm in about ~$7500 in debt right now.

I know the sensible thing is to put it directly towards debt. However, I'm a bit of a risk taker and was considering if I could *possibly* make some money with my $1200 and eventually pay off more of my debt.

I should add, I'm not struggling with debt. HOWEVER, I would have some extra saving/spending money if the debt wasn't there.

Wow! Appreciate the feedback.

More details: I don't have an emergency fund.

The difficult thing is this... I'm 22. About 2-3 yrs ago my father was diagnosed with lung cancer. He lived about 4-5 hrs away and meant the world to me. I stopped working so I could see him pretty much ALL the time. I would use credit cards to pay gas, bills, etc. After my father passed, a few months went by and then realized I was in tough. My debt used to be $1500 more. I couldn't make the min. payments, so Chase jacked my interest rate up to 29.99. I've called them so many times asking for forgiveness and it's a no go... DESPITE me being on time for the past 8 months.

Answer 1

heres a feesable suggestion,,

do you have a home,,

if youre credit is good enough and you have some equity in your home,, you could apply for a home equity loan,,,which usually,, carrys a small interest rate it would benefit you a ton in the long run,, you will pay that loan back and you d be able to claim the interest from the credit cards on your taxes,,

thus you could pay off your debts and pay yourself back,, and still keep your $1200 dollars to boot and would probably only have a monthly pmt of around $125 a month or so,,,

another option is contact a company like consumer debt relief ,, debt relief clearinghouse,, or consumer credit counsiling services,, they can conslolidate your debt,, and get your debts reduced by sometimes over 50%,, the may charge a small fee per month,, for adminstrative costs, but for all you save its pretty good,,


these really work,, take it from someone who filed bankruptcy 10yrs ago and had outstanding debts, i used all i could and my credit rating went from 480 to 678 now and my record is debt free,, and now in good standing

Answer 2

On the surface I have to agree with the other responders. Pay off the credit card debt then tear them up. But actually the proper answer might be more complicated than that. If you pay off the credit card debt and then turn around and rack up more debt on the credit cards, you have nothing to show for your troubles. Unfortunately, many people fall into that trap. Can't help spending the money they do not have. Now if you put the money into a Roth IRA account, that money is going to be somewhat difficult to get to in the future and is more assuredly safe from being spent. In other words it is an investment in your future. The downside is that you will still have that miserably credit card debt racking up interest at a rate that is much higher than you can expect to receive on any investment you might make in your IRA account.

Answer 3

With a balance of $7500, I think the best thing is to pay down the debt since credit card debt, in particular, is actually saving money but IN REVERSE - you're paying them interest instead of being paid interest in a savings account. Paying the $1200 toward the balance will reduce the cumulative interest you are paying on the total as it is figured (compounded) each month. As far as splitting it in half, it would be difficult to find an investment that would pay a good return for just $600 - many have minimums and fees that would reduce the principle. Good Luck!

Answer 4

If you could find an investment that would return more than the interest on the credit card, then investing would be the better choice. However, if anybody is telling you they know of such an investment, don't listen to another word. Nothing and nobody can guarantee that kind of return.

Are there investments that at the end of the year will have a 30% (or more) return? Almost undoubtedly there will be at least a few. What are your chances of picking one? Slim & none - and closer to none. Even investment professionals can't expect that kind of return.

The best investment you can make is to stop paying that credit card company the outrageous interest they're charging - get rid of that debt and then you will have more money later to be able to invest.

Answer 5

Usually, on a question such as this, I would recommend to pay down the debt. But $1200 isn't really much to lose if you have a good investment idea in mind. If you don't have anything in mind, then the question is relatively pointless. If you are just thinking about throwing it at the markets without any real knowledge of how the markets work, then you'll likely just lose a chunk of the $1200.

Answer 6

Pay off credit card debt. I don't know your card rate but it is likely higher than the 12-15% that the US stock market will make this year.

You say you are not struggling with debt . . . that is the stage just before you start struggling with debt. Once you get rid of credit card debt start contributing to an IRA for the best possible investment return.

Answer 7

Typically you should ALWAYS pay off your debt first!

Basically it's as simple as this:
Make the most out of your money!
That means, get as high a return as possible and pay out the smallest amount of interest...

And Credit Cards charge a RIDICULOUS amount of interest, so they are typically first on the list of debt to get rid of.

In fact you're frequently better off taking out another loan to pay off your credit cards!! Paying 10% on a loan is still much better than paying the 30% interest on credit card debt

But of course, if you can get your credit card debt paid off for free (i.e. no loan), then that's the best course of action.
That way you're geting rid of a huge drain on the overall return of your investments...

It's extremely unlikely that you would be able to make a bigger return from your available income than what your credit card company is charging..
E.g. Even if you could make 35% return by taking some money and investing it. If you still have that credit card debt, at 30% you're still only making 5% overall return.

Pay off that debt, and then, if you can make that 35% return by investing you get to keep it all!

Answer 8

There are too few stocks that will rise 30% after taxes to even consider investing that $1,200. You are much better off paying off that debt before anything.

Answer 9

I would ensure that you have at least $2K in your emergency buffer/rainy day fund.

Apply the rest to your debt!

The day I decided to chop up my credit cards was the day I started winning with money.

Answer 10

We need more information. Do you have a rainy day saving account? Have you funded your employee matching 401k? what is the rate on the credit cards- do you think you can get that out of your investment?