Clever Ways to Use Your Tax Refund to Improve Your Credit Score

By now, you should have received all of the documents that you will need in order to complete your taxes, which are due April 15.  Hopefully, you won’t owe any additional money, and if you’re lucky, you will get some money back.  Even though it can be tempting to splurge and spend that money for fun, you may want to consider putting yourself in a better financial situation.  Here are some clever ways to use your tax refund to improve your credit score. 

This post is sponsored by CreditRepair.com.  All opinions are mine alone and are honestly conveyed.

When filing your taxes, you don’t want to miss out on deductions and credits that you qualify for, you want to be able to get back a bigger tax refund this year.  Because tax laws change from year to year and so do the deduction and credit limits, you don’t want to consider your tax refund as part of your expected income each year, because it will fluctuate from year to year.  You want to consider it as extra income and be able to utilize it to put your family in a better financial position—and even increase your credit score.    

Settle collection accounts

Sometimes, you may have old items that have been charged off or sent to collections still showing up on a credit report years later.  You may have even forgotten about it, but if it is still showing as open on your credit report, it is most likely dragging your score down.  So, you may want to use your refund to negotiate a settlement amount with the collection company.  Doing this will allow the creditor to report that the account has been paid in full and is no longer in collection status—which will raise your credit score. 

Getting a collection account settled can be tricky though.  Of course, you can negotiate with the creditor or collection agency directly.  However, sometimes these situations are trickier than simply negotiating a settlement amount.  If that is your situation, you can always contact credit repair professionals to help you with this process.

Open a secured credit card

If your credit score is low, you may not be able to open a credit card, and without a credit card, it can be challenging to build your credit score if you don’t have much reporting to the credit bureaus on you each month.  It really can be a cycle that is tough to break.  However, you don’t necessarily need to be able to qualify for a regular credit card in order to build your credit.  This is where using your tax refund to open a secured credit card may be a good option.

What is a secured credit card?

A secured credit card is like a regular credit card, except that you must have a cash deposit in order to open this type of credit card.  For instance, if you take $500 of your tax refund and use it as a deposit to open a secured credit card, you will get a secured credit card with a $500 limit.  It is like a credit card in that you use it just like a regular credit card for purchases, but it is like a debit card in the sense that the creditor will keep the money from your deposit if you fail to make your payment.  However, unlike a standard debit card that is attached to your checking account, this secured credit card will report your payment history to the credit bureau each month.  So, once you have obtained this type of secured credit card, you will then be able to use it to make purchases throughout the month, which will then be reported to the credit bureaus.  It is important to make sure that you pay your minimum payment or balance on-time each month, as this is an important step in the credit-building process.

Pay down credit card debt

If you already have outstanding credit card debt, even if you are making your payments on time, it still could be dragging down your credit score.  Part of your credit score is calculated based on the amount of open credit that you have.  If you have five credit cards and they are all maxed out, it is most likely hurting your credit score.  You want to aim to have less than 50 percent credit card balance to the card limit.  So, if you have a credit card with a limit of $1000, you don’t want to carry a balance on that card over $500.  Keeping balances low and making payments on-time shows that you are responsible with your money and able to have access to a credit line without spending all of it.  Using your tax refund to pay down your credit cards can help to increase your score.

Pay off your auto loan or other installment loan

Getting a tax refund back may be big enough to allow you to finish paying off an auto loan or an installment loan.  An installment loan typically has a relatively high payment in relation to the balance, especially once it gets closer to the end of the term.  Paying off an installment loan is going to increase your credit score because that creditor will then report that the account has been paid in full.  Not only does paying off this type of loan improve your score, but it will free up money in your monthly budget, which you can then use to pay down other credit cards or debts.   

Invest in education

Are you at the point in your career that you could get a promotion or a pay raise by taking additional classes to obtain a certification or additional licensure?  If so, investing some of that tax refund into your education might be worth it.  While getting additional education does not directly affect your credit score, getting a promotion and being in a position to make more money might make it easier to pay down your credit cards or even pay off other debts—which would improve your credit score.

Make an extra payment on your mortgage

Using your tax return to pay down your mortgage is definitely more of a long-term strategy when it comes to increasing your credit score.  Obviously, making payments on-time, over the course of your loan, will build a solid credit history.  So using part of your tax refund to make one additional payment each year on your mortgage will work to cut down on the compounding of the interest by decreasing the principle amount that you owe.  This, in turn, will save you money because you are having to make less payments and will be able to pay off your home sooner.  And, just like any other account, when you pay off your mortgage, it is going to increase your credit score.