How to Use Your Tax Return to Build Credit

The average tax refund in 2021 was $2,827. And while getting a tax refund often means you overpaid to begin with, that hefty chunk of change hitting your bank account can spawn some great feelings. Before you drop all that dough on your next vacation or an impulse buy, consider whether you can do something more responsible with it. For example, did you know you can use your tax refund to build credit?

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How to use Your Refund to Build Credit

6 Tips for Using a Tax Refund to Build Credit

Just getting a decent amount of money in your checking account doesn’t mean your credit goes up. And in reality, there aren’t guarantees about your credit score.

However, here are some tools and methods that tend to move credit in a positive direction or help you impact your score in a positive way over time.

1. Invest in ExtraCredit®

Consider using some of your tax refund to pay for an ExtraCredit account. This subscription lets you get access to 28 of your FICO® credit scores and credit reports from all three bureaus, so you know what’s going on with your credit. Once you gain that access, you can also use some of your tax refund to invest in other tools, getting rewards and potential cash back through ExtraCredit. 

For example, if you find your credit score is lackluster and discover that it may be because of inaccurate information on your report, you could invest in credit repair services with a trusted leader in credit repair. If you sign-up through your ExtraCredit Restore It feature, you get an exclusive discount on the credit repair service. Challenging that inaccurate information and getting it corrected could give you a more accurate credit report and possibly improve your score!

2. Get a Secured Credit Card

If you have poor credit and know that everything on your credit report is accurate, you may need to take some other actions to build credit in the future. One option is applying for a secured credit card.

A secured credit card requires you to put a deposit down to secure your line of credit. That’s where your tax refund comes in. Once you use the card and make timely payments for a certain period of time, you may get your security deposit back. You could also get approved for a higher credit limit and/or lower interest rate. And all those timely payments also get reported to the credit bureaus, which can be good for your score. Make sure to choose a card that reports to all of the major credit bureaus.

3. Open a Credit Builder Account

Credit builder accounts are locked savings accounts that work somewhat like loans. The exact way they work varies, but the concept tends to be the same:

  • You secure a “loan” with a deposit. That deposit is put into a locked savings account and held for you.
  • You pay the loan as agreed, typically making monthly payments.
  • The on-time monthly payments are reported to the credit bureaus, and this helps build your credit.
  • Once you pay off the loan, the savings account is unlocked and you get access to that money.

4. Pay Down Your Debt

Dropping some money on your existing debt can also help improve your credit, especially if it’s revolving credit. That’s because your credit utilization rate plays a big role in your credit score.

Credit utilization refers to the amount of your open credit you’re using. So, if you have a credit card with a $2,000 limit and a balance of $1,000, your credit utilization rate is 50%. That’s considered high.

Using your tax refund to pay down one or more high credit card balances brings down your utilization percentage. That might have a positive impact on your credit. 

5. Open a Savings Account

You may already be working on your credit and just worried about making continual progress in the future. In this case, you might want to open a savings account and put the money away to support needs later. You could use the money to ensure you can cover payments on future debts in a timely manner.

6. Pay Any Late Bills 

On the other hand, if you’re running late with bills, you might use your tax refund to catch up. That puts you in a better position to make timely payments going forward, which is important for your credit score.

Other Responsible Ideas for Using Your Tax Refund

Of course, you don’t have to use your tax refund to build credit. Perhaps your credit is already good or excellent. In that case, you might want to consider a different type of responsible action with your refund. Here are a few options.

1. Start an Emergency Fund

Put the money away for a rainy day. An emergency savings fund helps you pay for unexpected expenses, such as medical bills or car repairs. Some people like to save up around six months of expenses to help cover a gap if they lose income or a job, and your tax refund might help you jump start such a savings.

2. Invest in Retirement

You might be able to add to your 401(k) or IRA accounts. Instead of putting your tax return directly into those accounts, use your tax return to cover normal daily expenses. Then, up the percentage of your paycheck that goes into your retirement account. That lets you save more while getting a tax advantage on the savings. And if your employer matches retirement contributions, you could save even more.

3. Donate to a Worthy Cause

If you’re already fairly set financially, you may want to support a charitable cause. You could donate to COVID-19 relief funds, your church, or a favorite nonprofit organization. Get a receipt so you can claim the donation on your taxes next year to help potentially increase next year’s refund!

4. Support Small Businesses

Small businesses took a huge hit during the COVID-19 pandemic. If you’re looking to give back with your tax refund and also spurge on yourself, consider making big purchases with small businesses

5. Invest Some Money

If you’ve ever wanted to invest in the stock market or buy some cryptocurrency, your tax refund might make that possible. Just remember to do your research or consult people who know what they’re doing before you drop all your cash into an investment app.

There’s a lot you can do with tax refund money. You can use your tax refund to build credit, get ahead on debt or treat yourself or your family to something. But before you can do that, you need to maximize your return.

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