Child Tax Credit: Many families used the first payments to pay off debt

Paying down debt was the most common way Americans used their first Child Tax Credit payment — especially among lower-income families.

Forty percent of Americans said their first payment went to pay debt, while 32% said they mostly saved the money and 27% said they mostly spent it, according to the latest Census Bureau Household Pulse Survey (HPS).

“That's actually a sign of the relief that these payments are giving families,” Claudia Sahm, senior fellow at the Jain Family Institute and former Federal Reserve economist, told Yahoo Money. “That is important and money well spent.”

The Internal Revenue Service (IRS) began issuing the advance monthly CTC payments on July 15 with over 35 million households getting the first payment in the last month. The monthly payments are $250 for older children and $300 per child under 6 and will continue to be distributed through December. The next payment will be sent out Friday.

The most common debt categories families used the payments to offset were food, utilities, clothing, and credit cards or student loan debt. Similarly, the money they spent or saved also went mostly towards those same categories as well as school books and supplies.

“If you give parents extra money, they're going to disproportionately spend it for their kids,” Sahm said.

‘When you give people cash, you empower them’

Similar to the CTC payments, many Americans also used the stimulus checks sent during the pandemic for debt. Around 45% of those who received the third round of $1,400 stimulus payments used them to pay down debt, according to an analysis by Sahm of the Surveys of Consumers at the University of Michigan.

“When you give people cash, you empower them to do what is best for their family,” Sahm said. “It's true that you are not necessarily getting new spending for the kids, but you are almost certainly helping take care of some obligations the parents have because of money they spent in the past for kids.”

It was largely low-income families that used CTC payments and stimulus checks to pay off debt. Households with income below $25,000 were most likely to use the CTC payments for paying debt — 54% reported doing so. The higher the income, the less likely the household used the money toward debt and the more likely to spend it.

‘We have these structural differences across households,” Sahm said. “If you have debt, you're incurring interest charges in almost all cases but if you can pay it off you are relieved of interest costs.”

The approximately $100 billion investment to increase the tax credit this year is estimated to generate about $794 billion in current and future benefits for society, according to the Center on Poverty and Social Policy at Columbia University, by increasing children’s safety and future earnings and improving health outcomes for both children and parents, among other positive effects.

The Democrats' $3.5 trillion budget proposal includes an extension of the expanded credit. The framework was approved by the Senate on Wednesday and is now drafted by committees.

“Putting money into kids is a really good return on investment and right now the federal government's costs of doing this are so low,” Sahm said. “We're not talking about a lot of money in the grand scheme of a $21 trillion economy.”

Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova

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