A woman in her office browses her cellphone.

How can I use my tax refund to pay off credit card debt?

3 min read

Published January 23, 2025

Table of contents

Key Takeaways

Using your income tax refund to pay off or pay down credit card debt can have longer-term financial benefits than simply reducing what you owe.
It may benefit you the most to pay down the balance on a credit card with a high interest rate.
Paying credit card debt can reduce your credit utilization rate, which may improve your credit score.

Are you expecting a tax refund? Millions of Americans get a tax refund each year, and it’s welcome cash to many. In fact, the Internal Revenue Service (IRS) reported more than 105 million tax refunds were issued to individuals in 2023. These totaled approximately $334 billion, with an average person getting a federal tax refund of $3,167.

Getting a tax refund often feels like “free money” or “extra money”, but in truth, your tax refund is money that you overpaid to the government throughout the year. Still, when you see that refund on your tax return, it can be a benefit to your personal finances.

There are a lot of things you could do with your tax refund. One option is paying off credit card debt, which can be beneficial to your finances in many ways.

You could pay down your high-interest debt

Are you carrying a balance on your credit cards and paying just the minimum monthly amount? If so, the interest payments may cause you to pay more than you borrowed in the first place. This is especially true if you have a high interest rate.

That’s why if you use your tax refund money to pay down your credit card debt, you may be able to save money. Use the Discover^® credit card interest calculator to see the credit card interest you'll owe for a given balance and interest rate.

You could improve your credit utilization ratio

Your credit utilization ratio is the percentage of your available credit that you’re using. For example, let’s say you have a $10,000 credit limit on your credit card. When you carry a $5,000 balance, your credit utilization is 50%.

In general, lower credit utilization is better for your credit score, as it makes up about 30% of your total score. When your utilization is low, it shows that you’re not using every dollar of credit you have available to you.

Along with making on-time payments each month, reducing your credit utilization could positively impact your credit. A better credit score could help you save money later by qualifying for a low-interest credit card or personal loan. You may even be able to complete a balance transfer for debt consolidation at a lower interest rate.

Did you know?

You might improve your credit utilization ratio by adding a new credit card and increasing your available credit.

Compare credit cards

Your tax refund can be used strategically

What if your refund isn’t enough to pay off all your credit card balance? You have an option to use your tax refund to kick-start your debt repayment efforts and reduce your overall credit utilization.

For example, let’s say you receive a $3,000 tax refund. One of your credit cards has a balance of $5,000 on a $10,000 credit limit (50% credit utilization), and one has $1,000 on a $5,000 credit limit (20% utilization). When you make a payment with your tax refund to reduce the $5,000 balance to $2,000, you’ll bring the utilization on that card to 20%. Even though you didn’t use the refund to pay anything toward the other card, this could still help improve your overall credit utilization ratio.

It’s not every day that someone receives a couple extra thousand dollars in their bank account. Paying down the balances on your cards is a strategic way to improve your credit report, and one way you could use your tax refund to boost your financial stability.

Important Information >