7 Smart Ways To Use Your Tax Refund To Improve Your Credit

If you are receiving a tax refund, the extra income could help you get ahead financially and improve your credit score.

Take action with the newfound funds to bolster your credit history with positive information, which should eventually lead to a higher credit score.

Your credit score is a three-digit number that can have a big impact on your financial life. For starters, lenders look at your credit score before offering you a loan. A bad credit score could lead to a loan denial, or you might pay higher interest rates on your borrowed funds.

Beyond lending, your credit score can be used by landlords, employers, and insurance companies. Depending on your situation, a bad credit score could make it hard to find an apartment, force you to pay higher insurance premiums, or even make it difficult to land a job.

The good news is that intentional credit management can help you improve your credit score. Here are some ways to use a refund to boost your credit profile.

If you have credit card debt or another type of high-interest debt, using your tax refund to pay off your balance is a good idea. Not only will you save money on interest charges, but you can also lower your credit utilization ratio on revolving debt.

For example, if you have a credit card balance of $3,000 and a credit limit of $10,000, your credit utilization ratio is 30%. If you pay off the $3,000 balance, your credit utilization ratio drops to 0%. This change can push your credit score higher.

If you don't have an emergency fund, an unexpected expense can force you to take on debt, which could end up hurting your credit score.

Generally, experts recommend tucking away savings to cover at least three to six months of expenses. Although it's a challenge to build up savings, growing an emergency fund with your tax refund can help you make fast progress.

If you've fallen behind on debt payments, use your tax refund to catch up. Payment history represents 35% of your FICO score, the most commonly used credit score.

Regularly missing payments can hurt your credit score. On the flip side, consistently making on-time payments can boost your number.

Using a secured credit card responsibly can help you build your credit score. However, a secured credit card often requires you to deposit up to several hundred dollars to start.

If you've been waiting to use this tool, the influx of cash from your tax refund can provide the funds you need to begin.

If you have accounts sitting in collections, use your tax refund to pay off the balance. In addition to a potential increase to your credit score, you'll also get the bill collector out of your life.

If you are juggling multiple loans and want to streamline your finances, consider taking out a debt consolidation loan that gathers all your debts into one monthly payment.

In many cases, debt consolidation loans have upfront fees. Use your tax refund to pay these fees.

If you manage the loan responsibly with on-time payments, your credit score will likely improve. But if you manage the loan irresponsibly, then you could see your credit score fall.

Opting to use your refund to pay off personal loans and student loans can make a big difference to your budget. Paying off these obligations means you won't have to worry about the monthly payments anymore.

Plus, eliminating these debts responsibly should help you improve your credit score.

Although a past financial mistake might have hurt your credit score, it's possible to turn things around by making the right financial moves.

Putting one or more of the tips on this list into action can help you improve your credit standing and keep more cash in your wallet.