Do you enjoy filing your taxes?
Yeah, me either. But getting a tax refund makes it all worth it in the end.
According to the IRS, more than seven out of 10 taxpayers received refunds in 2017. And the average refund was $2,895.
Some people save this money, while others spend it. But did you know you could also use your refund to build up your credit?
Here are five ways you can make the most of your tax refund to boost your credit score.
1. Pay off your credit cards
One effective way to use your tax refund to build up your credit is to put it toward high-interest debt, including credit cards.
Your debt-to-credit ratio, or “amounts owed,” is an important part of your credit score. In fact, it makes up 30% of your FICO score.
A good rule of thumb is to keep your debt-to-credit ratio below 30%. So if you have $10,000 in available credit, you want to owe $3,000 or less. Ideally, you can pay off your balances completely so that your ratio is 0%.
“The best way to raise your credit score is to pay down debt,” said certified financial planner David Rae. “If you are lucky enough to get a sizable refund, put it towards your credit card. This will give you the most bang for your tax refund bucks.”
So if you’re carrying credit card debt, consider using your tax refund to pay it off. And if you’re not, you can still use your refund to pay off your current balance. You should see a boost in your credit score.
2. Cover late payments or delinquent accounts
Your payment history also affects your credit in a major way, accounting for 35% of your FICO score.
That’s because lenders want to make sure you repay debt on time. Missing a bill is a red flag that could affect your ability to take out a loan or open a credit card in the future.
If you have any overdue bills, consider using your tax refund to cover them. You might also use the refund money to settle any debt that has gone into collection, particularly what has shown up on your credit report.
“[A] smart way to spend your refund is to make any late payments on monthly bills,” said Priya Mishra, a tax consultant and managing attorney at Top Tax Defenders. “The longer you wait to make the payment, the greater the negative impact on your score, so it’s best to take care of it as soon as you can.”
Unfortunately, delinquent accounts can remain on your credit report for seven years. But the sooner you deal with them, the sooner they will disappear.
3. Ramp up your student loan repayment
Not everyone has credit card debt, but 44 million Americans are dealing with student loans. If you’re a student loan borrower, you might put that tax refund toward your education debt.
Of course, this isn’t the most fun way to use your tax refund. But if boosting your credit score isn’t motivation enough, consider this: The faster you pay off your student loans, the less you will pay in interest.
Here’s an example using our student loan payment calculator. Let’s say you had a $10,000 student loan with a 6.8% interest rate and a monthly payment of $115. Over the course of 10 years (the standard repayment plan), you would pay $13,810 because of $3,810 in interest.
But consider what happens if you make an extra payment with a tax refund of $2,895. You would get out of debt 44 months ahead of schedule and save $2,149 in interest, according to our extra payment calculator.
Not only would you save money on interest, but reducing your debt and making on-time payments could increase your credit score.
4. Take out a secured credit card
If you’ve got weak credit, you probably know how difficult it’s to qualify for a loan or credit card.
Building your credit score takes time, but you can speed up the process by taking out a secured credit card.
“If your score is so low you don’t have a current credit card, then use your refund to open a secured card to begin rebuilding your credit,” suggested Todd Huettner, personal finance expert and president of Huettner Capital in Denver.
A secured credit card has you put down a deposit to back up your line of credit. As you make on-time payments, your credit score will go up. Eventually, it might be strong enough to qualify for an unsecured credit card.
“Using a part of your tax refund will make coming up with the deposit you need to put down easier,” said Rae. “Before you know it you will have built up your credit enough to get a regular credit card with all the perks and benefits.”
Plus, using a secured credit card should get you in the habit of paying off your credit card balance in full every month.
5. Save your refund to cover future debt or expenses
Once you’ve covered your debt and paid off your credit cards, you might have taken all the steps you can to directly boost your credit score.
In this case, you could save your tax refund in an emergency fund. Although this step won’t immediately improve your credit, it would help if you run into an unforeseen expense.
Instead of covering that expense with a credit card or personal loan, you could use the savings you set aside. As a result, you will avoid high-interest debt that could drag down your credit score.
“Establish an emergency fund of three to six months of living expenses,” advised Huettner. “The only sure thing is uncertainty. Having savings to cover emergencies will prevent you from making late payments.”
Saving your money could provide a safeguard against future debt.
Be strategic with your tax refund
Although it’s easy to use your tax refund for shopping or vacation, consider a more financially savvy plan instead.
“A tax refund is not ‘free money’ as many people treat it,” said Huettner. “If you receive a refund, use it as an opportunity to improve your credit and make up for any overspending.”
By using your refund strategically, you can improve your credit score and make your money work for you.