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Use your tax refund to make headway on this financial goal

  • The average household with credit card debt owes $16,748.
  • Typical tax refunds run $2,878, or $3,031 among those using direct deposit.
  • Don't ignore cash flow.

As consumer credit card debt mounts, using your tax refund to pay down balances is an increasingly smart move.

New Federal Reserve data show that consumers now owe more than $1 trillion on credit cards. Among households that had credit card debt at the end of 2016, the average owed is $16,748, according to a NerdWallet analysis.

Student with credit card
Arthur Carlo Franco | Getty Images

No wonder that many consumers have debt-related plans for their tax refund. The average income tax refund — $2,878 overall and $3,031 for those receiving the money via direct deposit, according to the IRS — could be a big help in your goal of knocking down that debt.

One in 5 taxpayers expects to put tax refund cash toward a debt, and 28 percent will use the proceeds to pay bills, according to a new survey from TD Bank. The bank polled 1,213 taxpayers in early March.

"Paying down debt should be your No. 1 priority," said Odysseas Papadimitriou, chief executive of comparison site WalletHub.com.

To determine which credit card balance should take priority, make a list of what you owe, detailing balances and interest rates. Then pick a strategy.

Some consumers prefer to focus the highest-rate debt first (a.k.a., the avalanche method); others knock out the smallest balance first (a.k.a. the snowball method), said Greg McBride, chief financial analyst at Bankrate.com. The former saves you more in interest, while the latter can free up money in your budget to roll into paying down other debts.

Factor in any interest-free balance transfer or other promotional offers, and when they end, said Papadimitriou. Although that's technically your lowest-rate debt, it may be a more pressing priority if you'll soon have a much higher rate.

"In reality you may have paid off the wrong credit card," he said.

Consumers using their tax refund to pay down credit card debt should also look for ways to improve their cash flow, said Andrea Blackwelder, a certified financial planner and a co-founder of Wisdom Wealth Strategies in Denver. Take a hard look at your budget and spending habits to avoid finding yourself in the same situation next year.

Consider adjusting your withholding to reduce your tax-time refund and keep more in your paycheck year-round, she said. That might help you avoid new debt and keep on track with paying down old debt.

littlehenrabi | Getty Images

"Part of what you have to focus on is how did I get there and how do I keep it from happening again?" she said.

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