“Using Your Tax Refund to Improve Credit: A Step-by-Step Guide”

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Boost Your Credit Score with Your Tax Refund

You can use your tax refund to improve your credit scores by paying down debt, bringing debt payments up to date, or starting an emergency fund to cover surprise expenses. With strong credit, you’ll be more likely to qualify for loans, credit cards, and even an apartment lease. You’ll generally receive more competitive interest rates, too, saving you money over time.

Maximize Your Tax Refund

The average tax refund so far during the 2024 filing season is $3,145, according to the most recently available data from the IRS. A windfall like this is a golden opportunity to give your finances a boost, and one of the most effective strategies is to focus on your credit score.

How to Improve Your Credit Using a Tax Refund

1. Pay Down Debt

Making extra payments toward revolving credit balances is one of the best ways to boost your credit scores quickly. As you reduce debt, your credit utilization ratio—the percentage of available credit you’re using—drops too. This ratio plays a major role in determining your credit scores. Experts recommend keeping your credit utilization ratio below 30%, but those with the highest credit scores tend to keep their utilization in the low single digits. To help improve credit, use at least a portion of your refund to make a dent in outstanding credit card or home equity line of credit (HELOC) debt, and keep your utilization low going forward.

2. Catch up on Late Payments

If you recently missed a credit card or loan bill, you may be able to use your tax refund to catch up and avoid a hit to your credit scores. Credit card issuers typically don’t report late payments to the credit bureaus until a full billing cycle, or about 30 days, has elapsed. Use your tax refund to make a payment before those 30 days are up, and you may avoid a late payment appearing on your credit report. That’s crucial, because payment history is the most important factor in your credit scores. A late payment will stay on your credit report for seven years.

3. Apply for a Secured Credit Card

A tax refund can give you the flexibility to open a secured credit card. That can help you establish credit history—or bounce back from a reduction in your credit scores—with regular, on-time payments. Secured cards work similarly to traditional credit cards, but they require a refundable security deposit that may also become your credit limit. This deposit acts as collateral for the card issuer, protecting it in case you don’t keep up with payments.

4. Open a Credit-Builder Account

You can also use your tax refund to improve credit with a credit-builder loan, which operates as a savings account that you make regular payments toward. When you apply for a credit-builder loan, a credit union, bank, or online lender sets aside a certain amount in an account for you. As you put your own money each month towards that account, you’ll pay off the “loan”—and the money you’ve paid will be there for you as savings at the end of the term. Since your payments are reported to the credit bureaus, you’ll also have a new series of on-time payments on your credit report.

5. Build an Emergency Fund

Starting or growing a savings account for emergencies won’t have an immediate effect on your credit scores. But it will safeguard your scores from the effects of going into debt to cover an unforeseen expense, like a medical bill or car repair. The ideal amount to save depends on the predictability of your income and expenses, and on your individual lifestyle. A healthy emergency fund generally covers three to six months of basic expenses, but you might decide you’d feel secure with more or less. Your tax refund can give you a jump start on your savings account, and you can contribute a small amount monthly thereafter to hit your goal.

Other Ways to Improve Your Credit Score

Apart from using your tax refund, you can improve your credit score in the following ways:

• Set up autopay for bill payments. To avoid missing credit card or loan payments, set up automatic payments with the issuer or lender—and ensure you have enough money in your connected bank account to prevent an overdraft.
• Become an authorized user on a credit card. You can ask a trusted friend or family member to add you to their credit card account as an authorized user, which is a fast way to gain credit history.
• Think twice before canceling old credit cards. Closing a long-standing credit card account can have a negative impact on credit scores by increasing overall credit utilization and reducing your accounts’ average age.
• Add positive payment history to your credit report. Use a feature like Experian Boost® to broaden the types of on-time payments on your credit report. It can help you add on-time utility, cellphone, insurance, and rent payments to your Experian credit file, potentially improving your credit scores as a result.

The Bottom Line

While it’s a good idea to treat yourself and spend at least part of your tax refund on something you enjoy, a refund has the potential to help you make progress on financial goals that would have been difficult to achieve otherwise.

Strong credit is one of the most powerful financial tools at your disposal. Make improving it your focus at tax time.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals!

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