Tax refunds are running higher than last year. Here’s how to make the most of yours

By Jeanne Sahadi, CNN

(CNN) — The IRS has processed 87.5 million returns so far this tax season and, as of March 27, it has paid out nearly 63 million refunds.

The average amount returned: $3,521. That’s up $351 (or 11.1%) from the same period last year, but still well below the average $1,000 boost that the US Treasury projected.

However large your refund (not just from Uncle Sam, but your state too), think about how it can be put to use most effectively in your life.

To help you make that call, consider the following five questions:

1. Are you behind on critical payments?

If you’re behind on paying for the essentials of your life – e.g., your home, your car or your child’s day care – and especially if you’re at risk of foreclosure or repossession – getting current on those bills with your refund should be a top priority.

2. Do you have high-rate debt?

If you’re not behind on essentials but you have high-rate debt, “That is priority No. 1,” said Kelli Smith, executive director of financial planning at Edelman Financial Engines.

Why? Because using your refund to pay down your balance may save you a mint.

Say you’re getting a $3,500 refund and are carrying a $5,000 balance on a credit card with a 23% interest rate. If you’ve just been making the minimum required payments, by the time you pay it off (which would take many years) you’ll have spent over $8,000 in interest payments alone, according to Stephen Kates, a certified financial planner and financial analyst at Bankrate.

By applying your full $3,500 refund to that debt, you’d reduce your total interest payments by $6,429, even if you just keep making minimum payments going forward and don’t continue adding purchases to the card balance, Kates calculated.

But it would be much better to move your remaining $1,500 balance to a zero-rate balance transfer card, which may give you 18 to 21 months to pay off your balance interest free. If you can’t secure a zero-rate card, consider consolidating all your credit card debt into a lower-rate personal loan. the advantage is that the loan will be structured, requiring you to pay a fixed amount every month over a fixed period of time to clear your balance, Smith said. Either way, you’re cutting your interest costs drastically. “Think of it as you’re paying yourself by saving yourself,” she said.

If you’re carrying debt on multiple cards, you might apply your refund to your highest-rate debt first, unless you have a balance on a lower-rate card that your refund can pay off in full. By choosing that route, Smith said, once you clear the lower-rate balance, you can redirect the monthly payments you were making on it to pay down your highest-rate debt.

3. Do you have enough to cover emergencies?

If you don’t have an emergency fund – or not enough of one to cover three to six months of living expenses – augmenting it with your refund is smart, Smith suggested.

Having an emergency fund is a great way to stay out of credit card debt in the future when unexpected expenses arise. And parking that cash in an online high-yield savings account that offers inflation-beating yields will preserve your money’s purchase power.

4. Do you have big, upcoming expenses?

If you’re planning to buy a car or a home or pay college tuition in the next couple of years, earmarking your refund for those goals will save you money because you’ll have to borrow less to finance them and therefore pay less interest overall.

5. Is there something special you want to do?

If your finances are in reasonably good order, you don’t have high-rate debts, and you just have consumer debts like a mortgage and student loans that you’re managing well, you might set aside your refund to finance a desire in the next year or two, like going on a big vacation or remodeling your home, Smith suggested.

And even if your refund is best used to lighten your high-rate debt load or create an emergency fund, you still might want to reserve a little bit for your enjoyment. Smith suggested, for example, that if a vacation seems unrealistic, you might set aside a couple of hundred dollars from your refund to enjoy during a staycation.

Standard refunds disclaimer: Getting a refund may feel great. But, technically, it’s simply a sign that you gave the federal government an interest-free loan last year. If you’d rather keep more of the money you’re paid every couple of weeks, consider whether you should adjust your tax withholding.

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