American Dream

Overcoming Financial Challenges: How One Student Paid Off $3,000 in Credit Card Debt With a Tax Refund

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When the winter months drag on and the weather remains ugly, many taxpayers around the country find some sunshine in a sizable tax return. Regardless of how much you make, receiving a check from the government every year is a great feeling.

As of February 2015, the average federal tax return was $3,120. This is not a life-changing amount by any stretch, but it’s certainly enough to take care of some financial challenges or make a big purchase. If you have the discipline to save the money or use it to pay down debt, a tax refund can improve your finances exponentially. Here’s the story of one such person.

Ignoring Personal Finances While in School

Justin Blum, a recent college graduate, holds a financially stable job as a full-time accountant. However, he still has to keep up with his student loans, rent payments, and other monthly bills.

As a way to pay for big expenses, such as test fees, while earning his degree, Justin took out a credit card with a promotional 0 percent APR. For 18 months, the card balance did not collect interest. Justin still had to make small minimum payments each month, but they were a calculated percentage of the card’s average balance.

As an accounting major, Justin never worried about being employed after college—or being able to pay off his credit. “I went through college with the thought that a good job would be enough to be financially secure, but I definitely underestimated my expenses,” he says. “Being an accounting major was great, but that sense of security in knowing I’d have a job also allowed me to get a bit reckless with my spending.”

In addition, his CPA exam fees didn’t help; at a few hundred dollars per test, and with four tests to pass, they added to his debt quickly.

Paying Off Credit Debt in One Giant Chunk

When the 18-month 0 percent APR promotion came to an end in September 2014, Justin’s credit card had a balance of more than $3,000. Its limit was $10,000—easy for a college student with limited income to get in trouble with. Credit cards typically do not come with low APRs, particularly if the card user is a recent college graduate with limited credit history. Justin now found himself in this situation.

When he received a combined $4,000 in tax refunds between federal and state returns, it only made sense for Justin to pay off his entire credit card balance. For a recent college graduate who’d just started a full-time job six months earlier, he faced a daunting bill and nearly 18 percent APR. Although he was tempted to spend his refunds elsewhere, he knew that tackling this financial challenge was the right thing to do.

“Within minutes of having the refund deposited in my checking account, I had to hit the [credit] payment button to make sure temptation didn’t get the better of me,” he says.

Taking care of the bill, which had lingered for quite some time, opened the door to smarter ways for Justin to spend his money. He has since increased his bimonthly 401(k) contributions, in turn increasing the amount of his employer’s match. His student loan payments are also higher now that he’s out of school. Without the added pressure of a large credit card balance, he’s in a much better place financially.