Credit Cards

If you get a tax cut, here’s your first move

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Justin Sullivan/Getty Images

Justin Sullivan/Getty Images

If the Trump tax plan means you’ll see more money in your paycheck, here’s the first thing you should do: Pay down your credit card debt.

The average American household with credit card debt owes about $9,600 to their credit cards, and with an average interest rate of a little over 16 percent, it can be increasingly difficult to get that balance under control.

Trump’s proposal is light on details, but his administration has touted it as the “biggest individual and business tax cut in American history.” The nonpartisan Tax Foundation found an earlier version of Trump’s tax plan would increase after-tax income for all tax brackets by 0.8 percent, with the wealthiest Americans enjoying the greatest benefits.

Not an invitation to spend

Even though it’s unclear what this proposal means to individual taxpayers, if Congress adopts the broad outlines of the Trump plan — which is not a given — many Americans should see more money.

That doesn’t mean it’s time to splurge.

Although taking home more in your paycheck may seem like an incentive to spend, don’t let the “wealth effect” of a tax break come into play, says David Kovari, a bankruptcy and debt negotiations attorney in Boca Raton, Florida.

“When people have a little more jingle in their pocket, they tend to spend more,” says Kovari.

That’s a bad idea, particularly if you need to open an emergency savings account or pay off credit card debt first.

“The easiest and most responsible thing to do is take that money and use 100 percent of that to pay down your most high-interest debt,” says Sam Dogen, founder of the blog Financial Samurai.

Here’s how that might look, using a credit card payoff calculator. Let’s say you have $5,000 in credit card debt and pay a 15 percent annual percentage rate. If you pay $100 a month now toward that bill, you’ll be debt-free in 79 months.

But if you bring home even an extra 50 bucks a month and put it toward your credit cards, you’ll pay off your debt nearly three years sooner.

Rising interest rates aren’t helping

Paying extra on your credit card is important today even if you don’t see a tax cut.

That’s because the Federal Reserve raised a benchmark interest rate in March and forecasts doing so again later this year.

That makes credit card debt more expensive.

“It’s a really bad time to have credit card debt,” says Beverly Harzog, a credit card expert and author of “The Debt Escape Plan.”

Those who run up credit card debt because they are living paycheck-to-paycheck and rely on credit cards to help bridge the gap are particularly affected by an increase in rates, Herzog says.

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