What do you plan to do with your tax refund? Maybe you have your eye on upgrading your phone, buying a new computer, or splurging on a long overdue vacation.
Have you considered using your tax refund to build your credit?
Granted, credit building doesn't compare with lying on the beach enjoying the sunshine, but you'll get long-term benefits that go beyond good memories and a tan. Last year's federal tax refunds averaged about $3,000, which could go a long way toward establishing new credit or restoring damaged credit.
If you don't have any credit at all, your tax refund could help you get a secured credit card. Traditional credit cards require a minimum credit score, but secured credit cards usually don't because they're backed by a cash deposit that determines your credit limit.
By making small regular charges and paying them off on time and in full each month, you'll build a positive credit history and can eventually move to a traditional card with rewards and other perks. To get credit score benefits, make sure that your secured card reports information to the three main credit reporting agencies (TransUnion, Equifax, and Experian). You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
Is your credit score suffering because your debt load is high? If you can, use your refund to knock down all debts to less than 30% of your credit limit. Apply any leftover refund money toward the highest-interest-rate debt (usually credit cards).
If you qualify, you can consolidate your debts under a balance transfer card with a 0% introductory annual percentage rate (APR) and pay down your debt without extra interest charges. Your tax refund could make the difference in paying off your debts before the 0% APR period expires.
The biggest factor in calculating a credit score is on-time payments. Your tax refund can help you keep payments on time – and if you place some of it in an emergency fund, you'll have a better chance of making future payments on time.
Did you already miss a payment? The longer you delay payment, the greater the credit score damage. Apply your refund to any overdue payments. If bills are only a few days beyond the due date and you have a generally good payment history, see if your creditor will waive the late fee.
Debts that reach sixty and ninety days overdue will incur greater fees and harm your credit score further – until the creditor writes off your debt and sells it to a collection agency. Your credit score will take a major hit. Start the rebuilding process by paying off your bill with the collection agency. Make sure that the agency really does own the debt in question and verify that they report repayments to the credit reporting agencies.
Once you've used your refund to build credit, keep the momentum going by setting up a realistic budget and controlling spending. Don't waste your hard work by going on a spending spree or forgetting to pay bills. It's far easier to ruin credit than it is to build it.
Use your tax refund to invest in yourself – but remember that you'd be better off not getting a refund at all. A tax refund means you paid the government more than you owed in taxes. You effectively gave the government a no-interest loan throughout the year.
Adjust your withholding to hang on to more of your money throughout the upcoming year, and you'll have a better chance of paying bills on time and paying down debt. Those are two great ways to keep your credit score high.
If you want more credit, check out our list of credit card offers.