You can use your tax refund to improve your credit scores by paying down debt, bringing debt payments up to date or starting an emergency fund to cover surprise expenses. With strong credit, you'll be more likely to qualify for loans, credit cards and even an apartment lease. You'll generally receive more competitive interest rates, too, saving you money over time.
The average tax refund so far during the 2024 filing season is $3,145, according to the most recently available data from the IRS. A windfall like this is a golden opportunity to give your finances a boost, and one of the most effective strategies is to focus on your credit score.
Here's how to improve your credit using a tax refund.
1. Pay Down Debt
Making extra payments toward revolving credit balances is one of the best ways to boost your credit scores in a flash. As you knock out debt, your credit utilization ratio—the percentage of available credit you're using—drops too. This ratio plays a major role in determining your credit scores. In fact, "amounts owed" accounts for 30% of your FICO® Score☉ .
Experts recommend keeping your credit utilization ratio below 30%, but those with the highest credit scores tend to keep their utilization in the low single digits. To help improve credit, use at least a portion of your refund to make a dent in outstanding credit card or home equity line of credit (HELOC) debt, and keep your utilization low going forward.
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2. Catch up on Late Payments
If you recently missed a credit card or loan bill, you may be able to use your tax refund to catch up and avoid a hit to your credit scores.
Credit card issuers typically don't report late payments to the credit bureaus until a full billing cycle, or about 30 days, has elapsed. Use your tax refund to make a payment before those 30 days are up, and you may avoid a late payment appearing on your credit report. That's crucial, because payment history is the most important factor in your credit scores. A late payment will stay on your credit report for seven years.
Additionally, your issuer can charge a late fee if your payment arrives even one day past the due date. But if you don't regularly miss payments and you can catch up right away, the card issuer may waive the late fee if you ask.
3. Apply for a Secured Credit Card
A tax refund can give you the flexibility to open a secured credit card. That can help you establish credit history—or bounce back from a reduction in your credit scores—with regular, on-time payments.
Secured cards work similarly to traditional credit cards, but they 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 even have to use your full tax refund to open up a secured card. You can usually choose your deposit amount, which for many cards starts at $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. That means making all payments on time, using as little of your available credit as possible and paying off your charges in full every month.
4. Consider Opening a Credit-Builder Account
You can also use your tax refund to improve credit with a credit-builder loan, which operates as a savings account that you make regular payments toward.
Here's how it works: 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 put your own money each month 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. However, make sure the lender reports to all three credit bureaus.
Compared with a secured credit card, a credit-builder loan is suitable for those who want to use their tax refund to make payments in installments, rather than as an upfront deposit. A credit-builder loan may also be a better fit for those who don't already have existing debt, since you'll have to add a monthly payment to your budget.
5. Build an Emergency Fund
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 an unforeseen expense, like a medical bill or car repair.
The ideal amount to save depends on the predictability of your income and expenses, and on your individual lifestyle. 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.
Other Ways to Improve Your Credit Score
Apart from using your tax refund, you can improve your credit score in the following ways:
- Set up autopay for bill payments. To avoid missing credit card or loan payments, set up automatic payments with the issuer or lender—and ensure you have enough money in your connected bank account to prevent an overdraft.
- Become an authorized user on a credit card. You can ask a trusted friend or family member to add you to their credit card account as an authorized user, which is a fast way to gain credit history. The primary account holder should understand that they are ultimately liable for making payments, but ideally, you'll work out a way to cover any expenses you accrue.
- Think twice before canceling old credit cards. Closing a long-standing credit card account can have a negative impact on credit scores by increasing overall credit utilization and reducing your accounts' average age. If a credit card comes with an annual fee that you can no longer afford, that's a good reason to cancel it. But if it's your oldest account, ask the credit card issuer if it can downgrade the account to a fee-free card rather than canceling altogether.
- Add positive payment history to your credit report. Use a feature like Experian Boost®ø to broaden the types of on-time payments on your credit report. It can help you add on-time utility, cellphone, insurance and rent payments to your Experian credit file, potentially improving your credit scores as a result.
The Bottom Line
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**. See terms at experian.com/legal.
Strong credit is one of the most powerful financial tools at your disposal. Make improving it your focus at tax time.