Use your stimulus check to pay off your debt

Who doesn’t like free money? Stimulus checks certainly have that feel, whether they really are or not. The question is, what is the best way to use this money? Let’s dive in.

First of all, if you are one of the millions of Americans who have lost their jobs due to the current COVID-19 pandemic, this money should first and foremost help you meet the immediate needs of you and your family. Having a roof over your head and food on your table is crucial, and stimulus controls have been and continue to be a much-needed lifeline for those in need.

But if you’ve been able to keep working or have enough money saved to meet your basic needs, you can reap different benefits from stimulus money. Here are some ideas.

This money could help you save on interest payments

If you have high interest credit card debt, use the money to dig into those bills. This could make a big difference in the amount of interest you end up paying. While putting it in a savings or chequing account would earn almost nothing in interest, paying off high interest debt could save you a significant amount of money. Try this calculator to see the impact your stimulus check can have in helping you get out of debt faster.

It should also be noted that even if your interest rate is not above average, you will still benefit from paying off those balances or paying them off completely. Having credit card debt weakens your overall financial situation and exposes you to unforeseen financial emergencies. I like to think of debt as a heavy burden that you have to carry and that can throw you off balance. A bump that would normally be barely noticeable to you can more easily knock you down.

How could this increase your credit score?

Credit usage (how much of your available credit you use) is an important part of your credit score. For your FICO score, it is worth 30 percent of your score, and it is considered “extremely influential” for your VantageScore. Reducing the use of your line of credit can improve your score almost immediately. This is especially true if you have 30% or more of your line of credit as a balance on your current credit cards.

If you can get below 25% by using your stimulus to pay off these cards, you will see an increase in score. The boost can be especially strong for those new to credit or with a lighter credit history. Remember, the people with the best scores have single-digit (or even zero) usage percentages. So using your stimulus check to get you to this point will help your credit score, especially if you can lower your usage in the long run. You won’t do yourself much good if you start charging more on your cards again than you can pay off after you’ve paid them off.

Is there a better use of this money?

For people who are not in dire financial straits, I suggest splitting the money whenever you get an unexpected windfall. This would include your stimulus check, but also any bonuses, increases, refunds, and any other unexpected money you might get.

Take the first half of this money to set up or build your emergency savings fund. If you don’t have one, this is a great opportunity to start it. If you have one, adding that money can help you fund it fully. “Fully funded” in my mind is anywhere from six months to a year of living expenses. Times being what they are, a few more months wouldn’t be a bad idea either.

The remaining half is yours. I suggest you keep using this system when you get other unexpected benefits like a tax refund, a raise at work, and even birthday money. Most of us need to take a break from saving and planning all the time. Spending half of an unexpected windfall on something you want now can provide the respite you need and keep you focused on your long-term plan.

Good luck!

Have a question about Steve’s credit score? Send him a message on the Ask Bankrate Experts page.


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