Pay Down Your High-Rate Debt
Hands down this is your first and best option. Typically, your highest rate debt will be a credit card, which may be charging you 15% to 20% annual interest or more if you've missed a payment. Set that against the 1% to 2% you can collect by sticking your refund in a money market account and it's easy to see why paying off the debt is a wise move. "Forget new shoes, rewarding yourself or gifts for others," says Erika Safran, a financial planner at Financial Asset Management Corp. in New York City. "This is a no brainer." Pay off the highest rate card first and then move to a card with lower rates. Don't use the money to pay down your home equity line of credit, though, because if your house has fallen in value the bank may cut your credit line as you pay it down and this is likely your cheapest way to borrow.