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Dorchester Center, MA 02124
Tax season is upon us, and for many, it brings the welcome sight of a tax refund. The average tax refund during the 2024 filing season is $3,145, according to the latest data from the IRS. This windfall presents a golden opportunity to enhance your financial health, particularly by improving your credit score. At O1ne Mortgage, we believe in empowering our clients with the knowledge and tools to make the most of their financial resources. Here’s how you can use your tax refund to boost your credit score and secure a brighter financial future.
One of the most effective ways to improve your credit score quickly is by paying down debt. Extra payments towards revolving credit balances can significantly reduce your credit utilization ratio—the percentage of available credit you’re using. This ratio is a crucial factor in determining your credit scores, accounting for 30% of your FICO® Score.
Experts recommend keeping your credit utilization ratio below 30%, but those with the highest credit scores often maintain it in the low single digits. Use a portion of your tax refund to pay off outstanding credit card or home equity line of credit (HELOC) debt, and keep your utilization low moving forward. This strategy not only boosts your credit score but also saves you money on interest payments over time.
If you’ve recently missed a credit card or loan payment, your tax refund can help you catch up and avoid a negative impact on your credit scores. Credit card issuers typically don’t report late payments to credit bureaus until a full billing cycle, or about 30 days, has elapsed. By using your tax refund to make a payment before those 30 days are up, you can prevent a late payment from appearing on your credit report.
Payment history is the most important factor in your credit scores, and a late payment can stay on your credit report for seven years. Additionally, your issuer may charge a late fee if your payment is even one day past the due date. However, if you don’t regularly miss payments and can catch up right away, the card issuer may waive the late fee if you ask.
A tax refund can provide the flexibility to open a secured credit card, which can help you establish or rebuild your credit history with regular, on-time payments. Secured cards work similarly to traditional credit cards but 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.
You don’t need to use your full tax refund to open a secured card. Many cards allow you to choose your deposit amount, starting at around $200. Secured card issuers typically report your payment history to one or more of the three major credit bureaus (Experian, TransUnion, and Equifax), so responsible use can help you build a positive credit history. This means making all payments on time, using as little of your available credit as possible, and paying off your charges in full every month.
Another way to use your tax refund to improve your credit is by opening 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 make monthly payments 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. Compared with a secured credit card, a credit-builder loan is best for those who want to use their tax refund to make payments in installments rather than as an upfront deposit. It may also be better for those who don’t already have existing debt, as you’ll need to add a monthly payment to your budget.
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 unforeseen expenses, like a medical bill or car repair. 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.
Apart from using your tax refund, you can improve your credit score in the following ways:
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. If you’re not sure where to put your tax refund, consider the Experian Smart Money™ Digital Checking Account & Debit Card. It can help you build credit without debt by linking to Experian Boost, which gives you credit for eligible bill payments after three months of payments. You’ll also pay no monthly fees and have access to more than 55,000 fee-free ATMs worldwide.
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. Our team of experts is here to help you navigate your financial journey and achieve your goals.