Ask Chuck: How To Use My Tax Refund To Get Out Of Debt

By: Chuck Bentley, Crown Financial Ministries

Dear Chuck,

I need help prioritizing how to use my tax refund. We are expecting to receive about $3,100 from our refund and want to use it wisely since we have a little over $23,000 of debt and are in desperate need of new tires for my car ($450). In what order should we use the tax refund money to do the following: put $1,000 into an emergency savings account, pay off credit card debt, pay off student debt, pay off the car loan, pay off a medical bill, or purchase new tires?

Overwhelmed with Debt

Dear Overwhelmed with Debt,

While I am sorry that you are feeling overwhelmed, the fact that you are getting a refund and want to spend it wisely is encouraging!

It would be helpful to have more information, especially about your income, assets, and details about each of these debts. Since I don’t, I’ll give you my priority list and a few suggestions based on what information you’ve included here.

  1. Buy the New Tires – $450
  2. Create an Emergency Savings Fund – $1,000
  3. Pay off the Medical Bills – $1,650 (the balance of the refund).
  4. Create a long-term plan to pay off the credit cards, the auto debt, and the student loans.

Here are the reasons why I have chosen this allocation and some tips to get debt free.

Use Your Tax Refund To Buy Tires

This is the first priority, especially if you use your car to get to work. Your transportation and safety are of utmost importance. It is only $450 and should not be delayed.

Use Your Tax Refund To Create an Emergency Savings Fund

The next priority is to get an emergency savings account in place so you can stop relying on your credit cards when you have unexpected expenses. The recommended starting amount is $1,000. Having available cash to cover unpleasant surprises will begin to break the cycle of debt. Here are 13 ways to get started saving.

Use Your Tax Refund To Pay Off the Medical Bills

I recommend that you use the balance of your income tax refund to pay off all remaining medical bills. This is a form of consumer debt that is not backed by any asset that can be sold or liquidated. It is important to keep your accounts current in order to receive service from your doctor or dentist as needed. Be sure to negotiate any reductions in the loan amount before paying it off in full.

Make a Plan to Get Debt Free

Once you have your new tires, an emergency savings account, and have paid off medical bills, you will be much better off and should feel less overwhelmed. You can apply what you were paying towards medical debt to your remaining consumer debt. It is important to plan now to pay off the credit cards, student loans, and remaining car debt; otherwise, it will be easy to find yourself in this position again.

Apply the Rollover or Snowball Method

This is a simple method to pay off loans while experiencing the victory of disappearing debt. You can find an in-depth tutorial and understanding of how to use this method in our free video series, 5 Steps to Debt-Free Living.

  1. Make a list of the balance owed on each debt. Order the debts from smallest to largest.
  2. Apply any extra money available to the one with the lowest balance first. Since you can pay this off faster, it is encouraging to check one off and work on the next.
  3. Once that debt is paid off, apply the money that was going to that one (the payment plus any extra available money) to the next debt.
  4. Continue rolling over the extra money to each debt until all are paid in full.
  5. Do not incur any additional debt. None!

If you only make minimum payments on your debt, while continuing to charge more on credit cards, the balance will continue to grow. Hopefully, this is not your case. But, if you are ever tempted to charge something, consider the long-term ramifications and walk away! Get a good friend to help you cut up your credit cards if needed!

Create a Long-Term Plan

You must be able to accurately track your spending to know exactly where your money is going. Then you can look for areas where you are overspending and where you can spend less to create margin for yourself. Realistic goals and a workable budget will quickly enable you to steward money wisely and eliminate your debt. You should consider adjusting your tax withholding so you can apply the money to debt this year instead of planning on a refund next year.

Finally, the sooner you pay off this debt, the sooner you will experience true financial freedom. With a united desire towards this end, you and your spouse can make lifestyle changes or set challenges for yourselves that will propel you forward. Working together, you can have fun simplifying and choosing to spend less so you never experience the negative side of Proverbs 22:7 again: The rich rules over the poor, and the borrower is the slave of the lender.

May you discover what excellent money managers you can be by encouraging one another and working toward mutual goals.

Call the Crown Helpline at 800-722-1976 if you need more encouragement or prayer support. Our friends at Christian Credit Counselors can help with the credit card debt restructuring as needed.

​Read More

4 Tips to Spring Clean Your Finances

By: Liane Weissenberger, CFPB

Spring is here, and it’s the perfect time to get your home and your finances in order. Here are a few ways to get started spring cleaning your finances:

1. Request a free credit report

You can request a free credit report every 12 months from each of the three major consumer reporting companies (Equifax, Experian, and TransUnion). Once you have your credit report, you can check for and correct any errors. This is especially important if you’re thinking of making any big purchases, like buying a new home. Our checklist will help you know what to look for in your credit report. Try setting a calendar reminder so you remember to check your credit reports on a regular basis. You can request all three reports at once or you can order one report at a time. By requesting the reports separately (for example, one every four months) you can monitor your credit report throughout the year.

Just like with the big three consumer reporting companies, you can also get free copies of your nationwide specialty consumer reports every 12 months from many of the specialty consumer reporting companies. Specialty consumer reporting companies collect and share information about employment history, medical records and payments, check writing, or insurance claims.

2. Address debt

If you’re facing a large debt or your payments are overdue, your first instinct may be to ignore the debt or hope it goes away. But, that may make things worse and lead to more stress down the line. There are strategies that can help you make payments that work for your current financial situation.

First, review your bills and make sure you understand what you owe. Our bill tracker can help you stay on top of your payment due dates.

Second, contact your lender to see if alternative payment options are available. You may be able to change your due date so that a payment is due closer to when you receive your income. Or, you could explore extended repayment options depending on your financial situation.

3. Review your spending

Have you ever looked at your credit card bill and wondered where all those charges came from? Or, have you found yourself swiping your credit card for a purchase before you’ve had a chance to think about it?

Gain control over your credit card spending by taking a close look at your credit card purchases over the past couple months. If you’re looking to cut back, try breaking down necessary expenses vs. wants. Once you see how you’re spending, try creating a “rule to live by” to make sure you stay on track. These kinds of simple personal guidelines, such as using cash for smaller purchases, make it easier to stick to your goals over time.

4. Save automatically

After checking your budget, you may see some more opportunities to boost your savings. For example:

  • If you have a bank account and direct deposit, you may be able to arrange to automatically deposit some of your paychecks to a savings account every time you’re paid, instead of all of it going into a checking account.
  • You can check with your employer to see if it’s possible to split your paycheck into two accounts. You may also be able to transfer some of the money in your checking account into a savings account.
  • You can check with your bank or credit union to see if you can set up automatic transfers.
  • You may also be able to use a prepaid card to set aside money for savings.

Did you know that nearly 46% of consumers indicated that they could not pay for an emergency expense of $400? When you save for unexpected expenses, you can handle them when they happen without having to skip other bills or borrow money. Start with $500 as your goal. This is enough to cover a lot of common emergencies, like car repairs, a plane ticket to care for a sick family member or smaller medical costs.

​Read More

Tax-Related Identity Theft & Scams

Tax-related identity theft occurs when someone steals your Social Security number (SSN) to file a tax return and claim a fraudulent refund. You may be unaware that this has happened until you file your return and discover that a return already has been filed using your SSN, or the IRS may send you a letter saying they have identified a suspicious return using your SSN.

Know the warning signs

Be alert to the signs of possible tax-related identity theft:

  • There is more than one tax return filed in the same year using your SSN.
  • You owe additional tax, have a refund offset, or have had collection actions taken against you for a year you did not file a tax return.
  • IRS records indicate you received wages or other income from an employer for whom you did not work.

Steps to take if you become a victim

  • File a complaint with the FTC at ldentityTheft.gov.
  • Contact the three major credit bureaus to place a ‘fraud alert’ on your credit records:
Equifax Experian TransUnion
www.Equifax.com www.Experian.com www.TransUnion.com
1-800-766-0008 1-888-397-3742 1-800-680-7289
  • Contact your financial institutions and close any financial or credit accounts opened without your permission or tampered with by identity thieves.

If your SSN is compromised and you know or suspect you are a victim of tax-related identity theft, the IRS recommends these additional steps:

  • Respond immediately to any IRS notice; call the number provided or, if instructed, go to IDVerify.irs.gov.
  • Complete IRS Form 14039, Identity Theft Affidavit, if your e-filed return is rejected because of a duplicate filing under your SSN or you are instructed to do so. Use a fillable form at IRS.gov, print, then attach the form to your return and mail according to instructions.
  • Continue to pay your taxes and file your tax return, even if you must do so by paper.
  • If you previously contacted the IRS and did not have a resolution, call 1-800-908-4490. They have specialized teams that can assist with tax-related identity theft.

Guard Against IRS Scams: What The IRS Will Never Do

Scammers often use tax season to prey on consumers’ identities and hard-earned money. Scammers may pose as IRS representatives and request personal information over the phone or offer to file consumers’ taxes for a fee.

The IRS will NEVER:

  • initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information.
  • call to demand immediate payment or call about taxes owed without first having mailed you a bill.
  • demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  • require you to use a specific payment method for your taxes, such as a prepaid debit card.
  • ask for credit or debit card numbers over the phone.
  • threaten to involve local police or other law enforcement groups to issue an arrest or suspend a license.

Consumers can help protect themselves from tax scams by keeping the following in mind:

  • The IRS contacts taxpayers by mail in most cases and will never ask for a credit card, prepaid debit card, money order or wire transfer immediately over the phone.
  • Never give out personal information over the phone, such as Social Security numbers, bank account numbers or credit/debit card numbers without verifying the source. To ensure the source is legitimate, hang up and call the entity using its official number.
  • Consumers who are unsure about their tax situation can reach the IRS at 1-800-829-1040.
​Read More