It’s tax time—which means it’s also tax refund time for millions of Americans. (The IRS issued 111.9 million refunds averaging $2,895 each in 2017.) While it can be tempting to spend that extra dough on a vacation or a fancy new TV, consider using it in a way that will pay you back for years: by building up your credit.
Good credit scores can help you save thousands of dollars on big-ticket items like homes and cars, and also help you become eligible for the best credit cards that offer the lowest interest rates and most lucrative rewards.
Read on for three ways to boost your credit scores using your tax refund.
1. Pay Down Your Credit Card Debt
If you are carrying revolving credit card debt, using your refund to pay some or all of it off is one of the best ways to boost your credit scores in a flash. That’s because once you knock out some of your debt, your credit utilization ratio—the amount of credit you use relative to the amount of credit you have available to you—goes down as well.
That ratio plays a big part in determining your credit scores in almost all scoring models. If you can get your utilization ratio below 30%, you’re in pretty good shape. But lower is even better.
“The sweet spot [for the best scores] is between 1 and 9%,” says Barry Paperno, a credit scoring expert who has worked for both Experian and FICO. “Aim to keep it at under 10% if you can.”
Say you have $10,000 of credit available to you across all your credit cards, and you carry about $3,100 in debt. Paying off just $200 will bring your scores up a small notch, but pay down $2,000 or more and you could bring your utilization 10% or less, giving you a significant scoring boost.
2. Open a Secured Credit Card
If you don’t have a strong credit history, using your deposit to open up a secured card is one of the best things you can do to help you establish a credit track record.
Secured cards work just like normal credit cards in almost every way, except they require you to put down a refundable security deposit that equals the credit limit on the card. This deposit amount acts as collateral for the card issuer, which helps make people with poor credit history a safer bet for card issuers.
John Yardley, chief marketing officer for First Progress, which is a leading issuer of secured cards, says that secured cards are an excellent option for consumers with limited credit history because they are almost always approved. “There’s no credit required for approval—the security deposit backs up the credit line,” says Yardley.
The card issuer still reports your payment history to the credit bureaus, so as long as you make payments on time, don’t use a lot of your available credit and pay the card off in full, you can use the card to build up a strong credit history.
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 could be as low as $200 to $500.
3. Catch up on Any Late Payments
According to Experian’s annual State of Credit survey, 36% of all consumers in the US have at least one credit account that is more than 90 days past due, while all Americans average 0.38 late payments a month. That’s pretty good, but it could be better. If you have missed a payment, use your refund to catch up as soon as possible.
Late payments are reported to the credit bureaus by your card issuer, but the longer you wait, the more adverse the effect on your credit scores. Don’t let a 30-day late payment turn into a 60-day one.
If you have missed a payment but can catch up right away, there’s also a chance your card issuer will be willing to waive a late fee if it’s not something you’re in the habit of doing. Many banks will offer a one-time courtesy waiver, so be sure to ask.