If you’re in a situation where you don’t need the extra cash to cover your utility bills or groceries, here’s why you shouldn’t use your stimulus cash to pay off what you owe — at least not right away.

If you can, conserve your money

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As the pandemic worsens, creditors are providing some leeway to folks who need financial relief.

Call around before you put that money toward your debts, because some credit card issuers are suspending interest charges and deferring bill payments.

"You should seriously save every penny you can. Do not go taking that stimulus check and using it all to pay off all your credit card debt, if that's all the cash that you have," financial guru Suze Orman told NBC's Today show.

Also, federal student loan collections have been deferred until October, with interest rates set to 0%. Some lenders may be willing to defer mortgage and personal loan payments as well.

Take advantage of the breathing room given to you by lenders and the government. That stimulus money will go a long way if you just hold onto it and let it accumulate interest in a high-interest savings account.

Shop around for better interest rates first

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If you’re stuck — unable to defer payments or interest — your debt won't just disappear because there’s a global pandemic going on. (That’s one thing that Lysol wipes can’t wipe away.)

But if you put your stimulus check straight into your debts, without considering debt consolidation or refinancing, a big chunk of that money could be eaten up by interest. It won’t go as far as you’re hoping. So:

Consolidate your debt.

One of the primary advantages of debt consolidation, especially if you’re juggling multiple credit cards, for example, is dropping the overall interest rate on your balances. If you cut the cost of your what you owe, your $1,200 stimulus check can make a more respectable dent in your debt.

Credit cards have an average interest rate of 15.1% according to the Federal Reserve, and rates can reach beyond 24%. Trading in your credit card debt for a debt consolidation loan — with an interest rate as low as 5.95% — makes a lot of sense and can save you a ton in interest.

Consolidation also could provide some much-needed relief during the current economic crisis, because once you secure a loan your credit card bill is essentially taken care of for that month.

Several sites are out there to let you easily compare multiple lenders for the best loan terms — without ever affecting your credit score.

Refinance your debt.

It’s possible to pay off your mortgage or student loans on a shorter repayment schedule and with a lower interest rate than you've got now. This is important because even if you’re able to get your lender to defer payments, you’ll more than likely still be accumulating interest.

With mortgages, now is the time to refinance — especially if your interest rate sits above 4%. Mortgage rates have dropped to all-time lows this year, well below 3.5%.

The best move is to aim for a lower rate and a shorter loan term — from a 30-year to a 20- or 15-year mortgage — because you'll save thousands of dollars in interest payments over the course of your loan. And rates have dropped so far that you might not wind up with the higher monthly payment that's typical of shorter-term loans.

The same is true for private student loans right now. If you can lock down a shorter term and an interest rate below 4%, you should make your move. Comparing rates is simple and free online and can save you thousands in interest on your student loan.

Once you’ve refinanced and have shrunk your monthly payments, your stimulus check will cover more of your overall debt and less interest.

The bottom line

Don’t be too hasty to spend your government relief money if you don’t need to do that right away, even when it comes to debt. Look into deferrals and interest pauses where you can.

And if you’re unable to catch a break, at least shop around for lower interest rates.

About the Author

Sarah Cunnane

Sarah Cunnane

Staff Writer

Sarah Cunnane is a staff writer at MoneyWise. She is a writing and marketing professional with an Honors Bachelor's degree in English and Creative Writing from the University of Toronto.