Everyone loves a tax refund. You work all year long, and when the IRS sends you a check or direct deposit, it feels like a windfall. In reality, it’s your money that you let the government use without charging them any interest! If you ordinarily get a refund, you might want to reduce your withheld taxes to increase your take-home pay all year long instead of getting a tax refund.
No matter what you choose, just know that it’s the perfect chance to use that windfall to boost your credit score. Of course, you can’t just go out and buy a higher FICO rating. However, you can use the money-back from the IRS to improve your score and make sure you’re moving in the right direction since your credit affects so many aspects in life.
1 - Pay down credit card balances
Credit utilization is a significant factor in your score, accounting for roughly 30% of the algorithm. It’s calculated by dividing total balances owed by total credit lines. If you’re over 20%, your score could be dropping every month even if you pay your bills on time.
Using your tax refund to knock that balance back and zero it out, or at least get it under 20%, is a good use of that cash infusion. With lower balances, your score should pop up pretty quickly. Just don’t let those balances build up again, ruin your utilization and drag down your credit score.
2 - Create an emergency fund
A recent study showed that 60% of Americans have less than $1,000 in the bank in savings. That’s scary and something you can correct with your tax refund. Consider stashing all that cash in a savings account that you can’t easily access.
If you keep it in checking, it could be gone before you know it. Setting up a special account that has no debit card access could be the ticket to keeping it safe. If you ever need the emergency funds, you can get to it quickly, but it won’t be so easy you drain it when you shouldn’t.
3 - Get a secured credit card
When rebuilding your credit score after a financial mishap, credit cards are one of the best ways to rebuild. However, if you’re coming out of bankruptcy or a lengthy financial crisis, you might have lost your cards.
Starting with a secured credit card might be your best bet, but it requires a cash deposit to set up a secured card account. You can use your tax refund to set up one or two secured cards and get your credit back on track right away.
4 - Pay off delinquent accounts
Accounts in collection are often a double whammy on your credit report. The initial debt, if it was one that reported to the credit bureaus (like a credit card), starts dragging down your credit score when you start missing payments or max out your card.
If you’re reported to a debt collector, they may make a second entry on your report, so the account can doubly drag your score. Paying off a delinquency could help your score, but be sure to negotiate terms before you pay including that they remove the collections entry from your bureau report.
5 - Catch up on past due bills
Even if your bills haven’t gone delinquent and into collections, they may be a little late. If you’re always a week or two behind on your payments or if you’re always paying utilities at the last moment to avoid being cut off, that’s stressful and can cost fees and late charges.
Use your tax refund to get current on your payments then stay current, so you don’t have to do it all over again. This can improve your credit, reduce anxiety each month, and set you on a path to financial consistency and betterment.
It’s tempting to splurge with your refund, but you need a better credit score more than you need a new TV or the latest smartphone. Use your tax windfall strategically so it can make a difference in your life. To find out more about improving your credit score, check out Credit Score Keys.