A tax refund can sometimes feel like “free” money. It might be tempting to use it for a holiday, large ticket item you’ve been eyeing, or even to put that money into savings or an investment to earn interest. However, it’s probably an even better idea to use your tax refund to pay down some of your credit card debt. Here’s why:

Where was that money when your credit card interest was accumulating?

When you think about it, your tax refund isn’t “free” money at all. It’s money you earned throughout the course of the year–money you could have used each month to pay down more of your credit card bills (which would have meant less interest being added to your balances).

Instead, paying too much tax is essentially like giving the government an interest-free loan. And all the while, your interest keeps adding up! While you can’t go back in time and remove the interest already on your account, you can take a bite out of that balance (and future interest) by using your tax refund to reduce your debt.

Paying off the Debt vs Saving or Investing Your Tax Refund

You may think it’s a better idea to put your tax refund into an interest-bearing savings account or investment account. On the surface it makes sense–this way you’ll earn some money and have funds available if you need them without further relying on your credit cards. The reality, however, is that you’ll still lose money.

You “lose” money every time interest is added to your credit card balance. It’s more money you have to pay back, and money that you never really had access to in the first place. Interest earned on savings accounts can be relatively low. It’s very unlikely that you’ll earn more interest on that tax refund each month than you’ll be charged on a similar balance on your credit cards. Even with a somewhat generous 10% return if you invest the money, there’s a good chance your credit card interest rates are higher. It may mean you’re ultimately losing a little bit less every month, but you’re still losing money.

Always compare the interest you’ll earn with the interest you’ll pay. Unless you’re in a 0% interest period for a balance transfer or using a low rate card like the Aussie MasterCard, you’re probably going to be better off using that tax refund to pay your debt rather than saving or investing it.

Using your tax refund to pay off credit card debt may not be the “fun” option for you and your family, but it’s likely a smart one. And look at it this way–when that debt is paid off and you’re not stuck making monthly payments, that’s more money each and every month that can go into savings, investments, or any purchases you want (interest-free!).