Use Your Tax Refund to Help Build Your Credit Score

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Tax Day has passed, and you already know if you will get a tax refund. Most people have a good idea of what they want to do with it shortly after learning how much will be coming to them. It usually involves taking a vacation or buying something you have wanted for a long time. A few others see it as an opportunity to reduce their overall debt, which is a good idea.

One thing that most people rarely think of is to use your tax rebate to boost your credit. It would have a long-term benefit—if you can control your spending.

Benefits of a Higher Credit Score

There is quite a difference between the benefits of having a low credit score and a good one. A good credit score, Experian says, is anything above 670 (FICO). Your credit score is very good if it is higher than 740 and exceptional if it is 800 or higher. The average credit score for Americans is 714.

When you have a good credit score, or better, it will open more doors to you. You can get better credit cards with higher limits and lower interest rates, find it easier to get a place to rent, enjoy lower insurance premiums, and get a better deal on a mortgage. You cannot get a mortgage at all if you have too low of a credit score.

You may even need to have good credit for certain kinds of jobs, such as jobs requiring you to handle money or have a security clearance. Forbes says that a good credit score can also help you get credit cards that have better rewards and will help you avoid having to provide a security deposit on your utilities.

Reducing Your Debt-to-Credit Ratio

The first and probably the fastest and best way to build credit would be to use your tax return money to reduce your overall debt. Lenders, whether credit card companies or banks, prefer you to owe less than 30 percent of your credit. They look for it because it shows that you have good financial control—that is, you do not always max out your credit cards just because you have them.

The thing that lenders want to know is that you can and do repay your debt, and that you can successfully manage your finances. Having a history of paying your bills on time is a major factor in determining your credit score. It is probably the most important. Being late with one bill can lower your credit score.

Paying down debt will help raise your credit score because it lowers your debt-to-credit ratio. The less debt you have in relation to the amount of credit you have helps to build your credit.

Get a Secured Credit Card

Another way to build credit fast is to get a secured card. These cards work like a credit card except that you pay upfront. You pay a deposit on the card, and your deposit—minus any fees—is your credit limit.

The main thing to look for when choosing a secured credit card is to ensure that the company reports to the main credit bureaus: Equifax, Experian, and TransUnion. When they do, it will raise your credit score but it takes time. If you use the card correctly, these companies will offer you an unsecured credit card after nine months to a year.

A secured credit card is considered a credit builder. They help people build their credit score. Since your deposit is your credit limit, it does not matter what your current credit score is because you will not even look at it.

Not all secured credit cards are equal, so you must look at a few before buying one. Check out the fees and minimum deposit—often between $200–500—and find out if there is an interest rate. Ideally, you want one with the Visa logo on it—which lets you use it anywhere you can use a Visa card.

Get Caught Up on Late Payments

When you are late with a payment on a bill, you may be able to save the day by using the money from your tax refund. Oftentimes, being late with one payment will not be reported to the credit bureaus, but missing a second payment—or being late with it—will be reported. If you can make up your late payment before the second billing period is over, you may be able to prevent a hit to your credit score.

Experian points out that you should prevent a late payment because it can remain on your credit report for seven years. Besides the negative mark, you will also have to pay a late fee.

Get a Balance Transfer Card

Paying interest on credit card debt means that it takes longer to pay off your debt. It also means the money you pay in interest is not reducing your debt. Instead, it is only making the card issuer richer at your expense and keeping you in debt longer. With a balance transfer card, you can pay down your credit card debt much faster.

If you can get a balance transfer card with zero percent APR (annual percentage rate), you can put your credit card debt on the new card and pay zero interest during the introductory period. MSN says having this card can mean you pay no more interest on your debt for up to 21 months. When you make a balance transfer, most cards will charge 3–5 percent of the transferred amount.

Instead of maintaining any debt you have now and continuing to pay interest on it, you can use your IRS refund check to reduce your overall debt—which will also reduce the size of your payments. You will also be happier having less debt hanging around your neck and a higher credit score.