Ask These 3 Questions Before Using Your Stimulus Check for Debt Payments

A woman looks at her bills while tracking her finances on her laptop.
Getty Images

The latest round of coronavirus stimulus checks will be landing in many of our bank accounts or mailboxes soon (if they haven’t already).

Should you use the money to pay off debt?

Our Penny Hoarder philosophy typically would be a resounding “Yes!” Using a financial windfall to put a dent in debt can save you from throwing away money on sky-high interest payments — and it has helped many people do just that.

Unable to shop, travel or eat out as they normally would, many Americans have used the money they saved to pay off debt. Credit card balances were $108 billion less at the end of 2020 than they were at the end of 2019 — that’s the biggest drop year over year since the Federal Reserve started tracking in 1999.

But should you use your stimulus check to put a dent in your debt?

We talked to a couple of financial experts about whether you should use your stimulus check to pay off debt.

3 Questions to Ask Before Using Your Stimulus Check to Pay Off Debt

Whether you’re receiving the $1,400 in stimulus money for yourself or for multiple members of your family,  figuring out what to do with your stimulus check should be among your financial priorities.

Similar to a tax refund, it can be easy to see this as “free money” that you can use for a little retail therapy or extra takeout orders. That’s understandable.

But even with the prospect of vaccines offering a light at the end of the tunnel, it may feel as if we’ll be stuck in pandemic mode forever. Your priority should be surviving and emerging on the other end without wrecking your financial future.

But is debt paydown the best use of your check? Here are three questions to help you decide.

1. Have You Lost Your Job or Think You Might?

If you’re among the estimated 10 million Americans out of work as of February 2021, your first move should be to switch to a bare-bones budget — and that includes cutting extra debt payments.

But what if you haven’t lost your job… yet?

If you work in an industry where layoffs were common before the pandemic or your employer has already cut hours and staff, you should prepare for a potential layoff, advised Ariel Ward, Certified Financial Planner at Abacus Wealth Partners.

“Put yourself in the shoes that you have lost your job,” she said. “What are the things you’re going to need to cover in terms of monthly expenses that are non-negotiable?”

Even if you have cash right now, it’s best to hold onto it if there’s a danger you’ll lose income in the near future.

Cash still offers more flexibility, noted Todd Christensen, an Accredited Financial Counselor with, a nonprofit debt relief program.

I can understand wanting to get rid of an extra debt payment, but if there really is a concern about losing a job, I’m going to say have as much cash on hand as possible.

Even if you’re spending it on an extra debt payment.

2. Do You Have an Emergency Fund?

If your job is fairly secure, is now the time to put that stimulus check toward credit card debt?

Not if you’re living paycheck to paycheck, according to Ward.

“If you don’t have at least a three-month emergency fund — even if you feel your job is safe — that would be the place I’d put your money,” she said.

I can understand wanting to get rid of an extra debt payment, but if there really is a concern about losing a job, I’m going to say have as much cash on hand as possible.

If three months seems like too steep of an ask, Ward recommended starting to build up at least enough money to cover one month of expenses.

“That would buy you some time if you did happen to lose your job before unemployment benefits might kick in,” she said. “If you only have $500 in your emergency fund, I would set your goal as getting to that one-month point.”

3. Will This Improve My Monthly Cash Flow?

You have a stable job. You have an emergency fund. Now can you use the stimulus check to pay off debt?

Maybe. But knocking out the debt — without dipping into your emergency fund — should also improve your financial situation.

“If paying off the credit card debt is going to make a difference in your monthly cash flow, it’s probably a good idea to go ahead and pay it off,” Ward said.

If the strategy of knocking out the smallest debt first sounds familiar, then say hello to your old friend, the debt snowball method. It’s where knocking out the smallest debt might not mean paying off the debt with the highest interest rate — that’s the debt avalanche method — but it does provide the financial and psychological advantage of freeing yourself of a credit card bill.

Bringing past-due accounts might be your first priority, even if it doesn’t wipe out the debt entirely. By putting your money toward these accounts — perhaps they’re the ones you let slide amid this past year if you were struggling to pay bills — you’ll reduce the fees associated with past-due accounts. Additionally, pulling your accounts out of delinquency can help you rebuild your credit score.

Putting a dent in a larger balance may indeed be a good idea if you’re paying sky-high interest rates and you have the money to spare.

But keep in mind that although economic conditions appear to be improving, there are no guarantees amid what has been a turbulent past 12 months.

So if there’s any question about your immediate financial future, you may want to hold onto at least some of the stimulus check money a little while longer or wipe out a monthly payment from your budget, allowing you to free up additional cash.

Just in case.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.