4 ideas to use tax refund to help build credit

By Pavithra R

Each year, millions of Americans pay income taxes to the federal government. But if you’re among those who paid more taxes than you owe, you’ll receive some of that money back from the IRS when you file your tax return. myFICO has outlined 4 tips on how you can use your tax refund to work on your credit. These are:

1. Bring past-due accounts current

Many people fall behind on their bills when they experience financial hardship. If you’re currently in this predicament, those past-due accounts are probably one of the first areas you should focus on when you receive your tax refund.

Making late payments to creditors can affect account holder in many ways, including owing late fees, paying increased interests and perhaps worst of all, late payments can damage FICO Scores when those delinquencies show up on credit reports. However, if you succeed to bring a delinquent account current again before it progresses to a charged-off status, your FICO Score might escape additional damage. Here’s an area where your tax refund could be put to good use. Paying off a past-due balance may also help avoid additional fees or rate increases from creditor as an added bonus.

2. Pay down your credit card balances

Paying down credit cards is another smart way to spend tax refund (or any other sudden influx of cash). According to the Federal Reserve, the average APR on credit cards that assessed interest was 16.28% during the last quarter of 2020. If an account holder uses their extra cash to eliminate some or all of credit card debt, it could potentially save a bundle in interest fees and help increase FICO Scores.

3. Consider opening a secured credit card

A well-managed credit card can be a helpful tool when trying to establish a credit history. But qualifying for a credit card with no credit or a lower FICO Score can sometimes be tricky. Some lenders might not be willing to approve the credit card application in such situations.

There is, however, a certain type of credit card account that’s generally easier to open. It’s called a secured credit card. A secured card may be an option even if the credit history is damaged or nonexistent. With a secured credit card, you put down a deposit with the issuing bank when you open the account. This is where your tax refund can come in handy. The security deposit lowers the risk involved for the lender. As a result, a card issuer may be willing to work with you despite the fact that you’re a higher credit risk.

4. Build an emergency fund

Using tax refund to fund an emergency savings account won’t change your FICO Scores in a direct sense. But if you have some cash tucked away, it could help you when unexpected financial emergencies arise.

An emergency fund gives you an added source of cash, so you don’t have to use credit cards to get you through a financial bind. Extra money in the bank can also help you to avoid late payments for a time if you experience a job loss or another reduction in your income.

Also, read Wealth Management and Private Banking Systems Report 2020