Business

We love tax refunds, but it’s better to pay off card debt year-round

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WASHINGTON — As tax season was coming to a close, I was surprised by the number of readers who took issue with my encouraging people not to aim to get a tax refund.

Many Americans love getting a refund — even when they understand that it means they had their employers take out too much money from their paychecks during the year.

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Bankrate.com recently found in a survey of 1,003 adults that 57 percent wanted to a get a refund, large or small.

As of April 3, the IRS said it had issued more than 77 million refunds, averaging $2,815 each. That means those people could have gotten an extra $235 a month during the year, on average.

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Some readers think it’s still OK to use a refund as a forced savings strategy. I like it when people challenge me, so occasionally I’ll let you argue your point in a Color of Money “Talk Back” feature.

Susie Bachtel of Arlington, Virginia, explained her reasoning:

“It pushes me to file my tax returns as quickly as I can,” Bachtel wrote. “I normally file in February instead of dawdling until April. It’s over and then I can get on with other things in my life!” she wrote.

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“I have developed a strategy that works for me. On Dec. 19 (the day of the month when my new Visa card cycle begins), I make a lot of year-end major donations that are tax deductible and are a big reason I get a refund. I don’t have to pay the Visa bill until mid-February. Often the tax refunds come in about the time I pay the Visa bill! So it’s a wash, and fun to play the refund game!”

Wrote Bill R. Teer of Fairfax, Va:

“Your column implied that it is a mistake to have too much withheld from your salary and give the money to the government interest-free. In today’s interest environment, I strongly disagree with you. If an individual had the discipline to save $100 per month rather than having it withheld, the savings at the end of the year would be $1,200 probably in a money market account with an interest rate of close to zero percent.

“As I believe it is unlikely that the discipline to save the $100 per month would be there, come refund time there would be nothing in the bank and no refund. So why not have forced saving in the form of withholding and get the refund?”

Lots of other people argued that last point, too.

“In this extremely low-interest environment, how much money do you really think an individual would gain on that refund, which would actually be trickling in with every paycheck by adjusting their deductions?” one reader wrote.

“I see your point that you don’t want someone else having use of your money all year, but from a practical standpoint, the amount of interest lost is probably pretty small. And, if an individual sees that check as a bonus and uses it to pay off a credit card or part of an auto loan, then that’s probably a good thing since having a few bucks added to the paycheck will most likely not be noticed and will just be spent on another cup of Starbucks.”

The average IRS refund of $2,815 means the taxpayer could have used $235 a month during the year, on average, to pay off high-interest debts.

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Come at this issue like everyday people, suggested William Adams from Springfield, Va.:

“Think of letting the IRS hold your money as a very cheap premium on an insurance policy against having problems with penalties and interest from the IRS as well as gaining peace of mind over the stress of having to meet a deadline when you have other things pressing and can’t file on time.”

It’s true that the interest you get on deposit accounts almost makes you feel as if you’re paying the financial institution to keep your money. But an extra $100 or $200 a month could be used to tackle high-interest credit card debt.

Let’s say you do use the refund to pay down some debt, as many say they will (68 percent), according to a survey by the National Foundation for Credit Counseling. But over the previous year, you had been racking up interest charges while making just the minimum monthly payment.

In 2014, the rates on credit cards were at record highs, according to Creditcards.com. The national average APR was 15.02 percent.

But here’s the thing on the issue of refunds:

Part of my mission is to challenge people to develop more discipline. I want them to take every opportunity to be better money managers.

Nonetheless, if getting a refund is the only way some folks will save, fine.The most important thing is that they come out better off financially.

Michelle Singletary can be reached at michelle.singletary@washpost.com.
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