Use Your Tax Refund to Raise Your Credit Score
Using a tax refund to splurge on a mini-vacation, luxury item, or other special purchase provides a temporary thrill. But the excitement of treating yourself is typically short-lived. While there's nothing wrong with enjoying "found" money, using some of it to help improve your credit can provide longer-lasting benefits.
Here's how to use your tax refund to improve your credit.
Get caught up on past due accounts. If you've missed several payments or have an account in collections, now is an excellent time to bring your account current. Ensure you have a plan to make on-time payments going forward since payment history is one of the most significant factors in determining credit health. Catching up on these accounts also helps you avoid pesky late fees.
Consider working with an experienced credit counselor, like GreenPath™ financial wellness, who can examine your finances and help create a budget that will allow you to better manage your income and expenses. A credit counselor could also help you create a plan to stay on top of future payments.
Reduce account balances. Use the refund to pay off several small credit account balances or reduce the balance on your largest credit account. Doing so can relieve financial stress and improve your credit score at the same time. Typically, the less available credit carried over each month, the higher the credit score.
Aim to keep your credit utilization ratio, the percentage of credit you're using at any given time, below 30% to see significant credit score improvements. This ratio is only second to payment history as the biggest influence on your credit score.
Build or improve damaged credit with a secured credit card or loan. If you're new to credit or have a bruised credit history that makes it difficult to borrow money, consider applying for a secured credit card or personal loan. These cards and loans are guaranteed by the amount in your savings account and do not require a credit check. For example, if the loan is secured with a $500 deposit, the credit limit equals $500. If you don't repay the borrowed amount as agreed, the lender can claim the account balance.
Use the card or loan proceeds as you would unsecured funds. By making on-time payments, you could improve your credit. The lender may report your repayment history to the major credit bureaus, Equifax, Experian, or TransUnion.
Boost your emergency savings fund to minimize borrowing. Opening new credit accounts can lower credit scores. It's also unnecessary if you've already set aside at least three months of living expenses to pay for unexpected costs that might otherwise derail your budget. For example, a $2,500 auto transmission repair isn't something most monthly budgets can manage. Instead of applying for new credit to pay for the expense, tap your emergency fund to cover the cost — interest-free.
Deposit a portion of your tax refund into your emergency savings account. If you haven't started saving, use the refund to kickstart the fund. Set up an auto-transfer from your checking account to grow the balance each month.
Make the most of your tax refund by using some of it to improve your credit. A healthy credit rating could bring you closer to achieving other financial goals.