Hey everyone, I'm looking for some advice on the best way to use a $2,000 tax refund I just received. My credit score is currently in the low-to-mid 600s, and I want to make the smartest move to build my future while giving myself some peace of mind.
At first, I wanted to put the $2k into a brokerage account to invest in the S&P 500 and earn dividends. I also briefly considered getting an online personal loan to consolidate everything, but after looking at the terms, the fees and interest rates were astronomical, so I am definitely avoiding that trap.
Now, I am focused on using the cash to aggressively pay down my credit cards. Here is my current breakdown:
• Card 1: $3,300 (87% utilization)
• Card 2: $800 (80% utilization)
• Card 3: $300 (95% utilization)
• Card 4: $300
(Note: I also have a $25k auto loan, but I am just making the standard monthly payments on that right now).
I am torn between two strategies:
Option 1: The Snowball Approach
Pay off Cards 2, 3, and 4 completely. That takes about $1,400. I would put the remaining $600 towards Card 1.
• Pros: I completely eliminate 3 monthly minimum payments, giving my daily budget a lot more breathing room. It also instantly fixes the 95% and 80% utilization red flags on my credit report.
• Cons: The largest debt is still sitting around $2,700.
Option 2: The Big Chunk Approach
Put the entire $2,000 towards Card 1, bringing the balance down to $1,300.
• Pros: This card charges the most raw interest every month, so it saves me the most money mathematically. It also drops the utilization on my biggest credit line from 87% down to roughly 34%.
• Cons: I still have 4 separate bills to pay every single month, and my smaller cards stay nearly maxed out.
Which route would you take if you were in my shoes? Is freeing up the monthly cash flow and fixing the high individual card utilizations worth more than attacking the largest balance first?
Thanks in advance for the advice!
Got a $2,000 tax refund. Do I wipe out 3 small maxed-out cards or put a massive dent in my biggest one?
byu/Few-Let-3861 inpersonalfinance
Posted by Few-Let-3861
38 Comments
pay off from highest interest first. you don’t need to care about your score if you are in debt. just pay it off and it will recover normally
Your biggest issue isn’t your credit score, it’s the amount of interest you are paying.
What are the rates on the cards? You should pay off the debt with the highest rate first.
You listed everything except the important part. Which debt has the highest interest rate %? Focus on that debt first. This is the avalanche method of debt repayment, which minimizes how much interest you are charged, getting you out of debt the fastest.
Not an expert by any means but I’d just eliminate the 3 smaller cards at once so I can then focus on a single larger issue.
I wouldn’t want to accidentally lose track of what needs to be done across account, just consolidate your task into one big item to check off. Either way, you are doing the right thing 🙂 pay those debts off
I’d do the 3 smaller cards. Then roll those monthly payments into the large one and attack aggressively.
Interest wouldn’t be my motivator in your scenario. A lot of others do think of that first though!
“At first, I wanted to put the $2k into a brokerage account to invest in the S&P 500 and earn dividends.”
Wrong way to look at it for nearly all people. Dividends aren’t magic, they literally come out of the value of the stock, so taking dividends is essentially selling a small amount of stock periodically.
In any case, the S&P500 currently gives about 1.2% in quarterly dividends, so on $2000 you are looking at like $8/mo, so it isn’t like it really even matters. Just set it to re-invest.
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“I also briefly considered getting an online personal loan to consolidate everything, but after looking at the terms, the fees and interest rates were astronomical, so I am definitely avoiding that trap.”
Your credit cards are almost certainly at like 25-30% — were you really getting consolidation offers so much worse than that that those are what you consider “traps”?
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As far as the order of paying off debts, the two common options are snowball (smallest debts first) and avalanche, which is paying off the highest interest rates first. The former might be better for some people as seeing whole debts fall off might give them a psychological boost. The latter is better mathematically.
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And with the auto loan, I wouldn’t just put it aside — what is the rate compared to the other debts? If it is higher (which is unlikely next to credit cards), then it still might make sense to go above the minimum payments.
I’d kill the smaller cards so you can put their minimum payments twords the bigger one. Your essentially skipping to the end of the snowball.
This is where the “personal” in personal finance comes in. While paying off the highest interest card is the right thing mathematically, lets say Card 1 is the highest interest, and you pay off $2k of the $3300.
What is the likelihood that over the next few months, you just put another 2000 dollars on that card again, bringing you right back here?
Vs. paying off (and closing) the smaller cards, so you don’t have that temptation as much.
Wipe out the 3. Then start tackling the massive debt. It’s a big psychological motivator .
You were right not to invest it. Any gains made from investing are going to be wiped by your debt accruing likely more interest.
Pay the highest interest debt first, unless that approach leaves you with too many minimum payments to handle. In that case, you could focus on the smaller cards first.
What are the interest rates on the 4x cards? If they are close to the same, I would pay off the lower 3x as it just simplifies things.
Problem: an unused 0 balance card will eventually get cancelled and utilized credit will go up. This can also impact the “length of credit history”
Solution: Pay off the 3x cards. Move a small monthly subscription service (netflix, AAA, credit monitoring) to each one so the cards stays active. Obviously pay them off each month. Once this is done, lock the cards and cut up the physical card.
> This card charges the most raw interest every month, so it saves me the most money mathematically
This is not really how it works. You want to look for the debt with the highest interest rate because that saves you the most interest per dollar that you pay.
For example:
Card 1 has a balance of $3000 at a 10% interest rate. This means you pay $300 of interest per year.
Card 2 has a balance of $1000 at 15% interest rate. You pay $150 per year.
If you have $500 to put towards your cards, if you pay towards card 1 with the higher raw interest amount you will now be paying a total of $400 interest per year ($250 on card 1, $150 on card 2). If you pay towards card 2 instead, you will pay $375 interest per year ($300 on card 1, $75 on card 2).
Paying towards the highest interest rate always saves you the most money long term.
Pay the credit card with the highest interest, but also pay the minimums on all others.
We really need a sticky that says “this is what interest rate is”. How is there people signing up for credit cards and not knowing what interest rate they are signing up for? Is it 10%? 20%? 30%?
Paying off debt is the primary goal. Keeping focused on getting rid of all the debt is what you know you need to do.
Which strategy is going to get you to that goal?
I would say paying off the little ones and cancelling at least two of them and applying all the payments to the big one.
Having multiple accounts means there is more chance you could have a problem. An auto payment doesn’t go through. A card gets stolen and it takes a couple of months to unravel. Minimize your accounts and lessen your chances of problems.
Mathematically, you would pay off the debt with the highest interest but tbh this is more than a mathematical problem as you wouldn’t have these credit cards ideally if you were concerned with the math of compound interest. So go with option 1 and create some momentum for yourself and some little “wins” that get you excited about paying off the last largest debt.
Just by pure math: put it all towards the highest interest debts (as long as you have enough to pay the minimums on the other cards). Every dollar on a high-interest card is racking up interest every month.
The main benefit of the snowball method, on the other hand, is the motivation that comes from paying off cards completely. So if paying off three cards gives you the drive to continue your journey, do that. But by pure math, it’s not the smartest move.
You care about utilization of each card. Just focus on getting them paid off. You didn’t post the interest rates. If they’re all similar, then go with the snowball. And then KEEP then paid off
if similar interest rates I’d pay off the 3 and put the remaining towards the 1. then the payments from those 3 can be put towards one in future months. Once paid off don’t charge more than can be paid off each month going forward.
Card 3 should be paid immediately. You don’t want to risk going over your credit limit with interest accumulation. Then whatever the highest interest is.
I’m a believer in the snowball approach. Pay the smallest first.
Two options;
Pay off the highest interest first, which is the quickest way to get to the end goal of no debt. The downside is that while efficient, it may mean dumping a load of money into a big debt where you see little immediate reward – a silly thing to consider, but the psychology of tgis does matter to how easy it is to maintain.
Alternatively, nuke the smaller cards, remove them from the list entirely and take a much more visible step forward. It may not be the most efficient route, but it does mean you earn the satisfaction of seeing that money going towards something concrete, and it also removes the hassle of having additional cards and payments hanging over your head, so it reduces the chance of a mistake in your payments throwing you off course.
Which one makes most sense to you is a personal choice – there is no correct answer.
You, specifically, need to pay off *and close* the 3 small cards. Then lock your credit, and **stop signing up for new cards**.
Then work on the last card and close it as well.
If you’re only able to pay off cards because of a tax refund, you’re way over your head and don’t need to be playing this game with your money.
Pay off the small ones. Cash flow is king.
With credits at $300 – $3300, the truth is whether one card is 29% interest and another one is 24% interest doesn’t really matter. Oh no, you pay down the 24% card and not the 29% card.. you’re out another $2.50 a month. ohh no….
Pay off the three cards, it’ll feel a lot better than saving $3-4 a month in interest for the next 2 or 3 months as you tackle the other card.
You said it yourself, you were looking to consolidate everything into one loan. Just pay off the smaller cards and be done with it.
I would move all the balances into 1. There are usually offers for a 3% fee and no interest. Then pay $2000 and keep paying it off
Pay off as many cards as possible. That gets your utilization down which boosts your credit score. I’d then apply for a 0% intro card and shift as much of your remaining balance on it so as to pay it off quicker.
And don’t listen to people who say to close the cards. That tanks your score as your free credit ratio is ruined. It also means less credit for emergencies.
highest interest rate first, otherwise known as avalanche method
you’ll save the most money this way
$1000 into an Emergency Fund.
Remaining refund, kill smaller cards. Snowball going foward.
Best investment is ridding yourself of high interest cards.
BUDGET!!!!
Move the cc debt into an interest free card for a year and pay it off. Make payments as normal. try not to give the govt an interest free loan next year.
Pay off the higher interest rate card first. When the others are paid off start on an emergency fund.
what you do Wont matter unless you get your spending habits in check & stick to a budget.
reduce expenses and spending.
stop buying things on a credit card unless you have the money in your bank/pocket to buy that item outright.
smartest is to pay off the highest interest rate debts first,
but if all those cards have about the same interest rate, then yes, pay off the 3 completely and then focus all extra money towards paying off the rest of yoyr debt.
You need to stop using multiple cards. Once you start paying interest on the card it keeps going on the new purchases bc it’s looking at the daily balance. I carried a balance once, got it paid off, used it the next month for new purchases which I subsequently paid off right away and I accrued interest for those new purchases.
Debt snowball is best here. Pay those 3 off, cut em up and start knocking down the big one with the leftover money you’re saving next month.
I think wiping out the three would give you a psychological boost. Then you can put all your attention on eliminating the one that’s left. I just think you’ll feel better to see some totally gone. Just be sure to close the accounts so you aren’t tempted to use them again.
Do you like being in debt? That’s the real first question you should ask yourself. If you don’t, you have an opportunity to get free starting right now.
When I first borrowed money in my early 20’s, I didn’t live without debt for the next 32 years. Car loans, credit cards, personal loans, student loans, parent plus loans, on & on. At 52, my wife & I had $160K of debt. We made great money yet were broke at the end of each month.
We made a list of all our debts from smallest payoff to largest and attacked them with vengeance. We became debt free in 18 months.
If debt scores, utilization and all those other things make you happy, I don’t have much to offer in the way of suggestions. If living with debt, (somebody else owns you), makes you angry, well then I know the way out. And if we could get out, I know you can get out.
You’ve got $2K opportunity to start living different today. You just have to decide you want. That’s all that’s needed.
I can tell you, my wife & I sleep like babies not worrying anymore about money or who we owe. I hope you choose to go debt free. I hope you go at it with a vengeance like we did, then find yourself free from anybody. Then you’ll find yourself in a spot to save for an emergency and then after, plow all kinds of money into investing. One day you wake up and thank the younger you for making that choice.
I personally would take the Snowball option, especially when you consider the small scale of this. You didn’t provide APY numbers so I’m making some up, but:
Avalanche (Option 1) $2700 at 21% interest with a $302 payment each month would pay off in 10 months, and accrue $262 in interest in that time.
Snowball (Option 2) $1300 at 21% with a $151 payment is paid off in 10 months, $121 in interest. If the other $1400 combined is at an interest rate of 18%, and you put $151 towards those, that’s $118 in interest. $239 total.
So, in option A you’d only accrue a measly $23 extra in interest. But, Option B gives you some flexibility with that extra $151, and also provides a nice psychological motivator.
Pay off card #3 & #4, put the remainder towards the biggest card.