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Waiting for Your Tax Refund? Here's how it can be Used to Strengthen Your Credit Score

Learn how to utilize your tax refund strategically for long-term financial security.
Cover Image Source: A copy of an IRS 1040 tax form | Getty Images | Photo by Joe Raedle
Cover Image Source: A copy of an IRS 1040 tax form | Getty Images | Photo by Joe Raedle

Americans are eagerly awaiting their tax refunds at the end of the financial year, with each of eligible to receive an average of $3,081, as reported by the IRS. This windfall presents a unique opportunity to kickstart your financial goals. If you've got your regular expenses covered, consider leveraging your tax refund to enhance your credit score. Building credit is a crucial step towards financial stability and achieving your long-term objectives.

Unsplash | Photo by Kelly Sikkema
ImageSource: Unsplash | Photo by Kelly Sikkema

Consider applying for a secured credit card if you're unable to qualify for a traditional credit card due to a lack of credit history or poor credit. Secured cards require a security deposit upon account opening, reducing the risk for issuers and increasing your chances of approval. Allocating a portion or all of your tax refund towards the security deposit can help you obtain a secured card. Your payment history with the card will then be reported to credit bureaus, allowing you to demonstrate responsible credit management.

While carrying a credit card balance alone doesn't inherently damage your credit score, maintaining a high balance that approaches your credit limits can negatively impact your credit utilization ratio, thereby potentially lowering your credit score.

Unsplash | Photo by Leon Dewiwje
ImageSource: Unsplash | Photo by Leon Dewiwje

Clearing your debt with your tax refund is a prudent choice, even if the refund doesn't cover the entire balance. Also, consider transferring your existing credit card balance to a card offering a 0% APR on balance transfers, after which you can enjoy an interest-free period to repay the debt without accruing additional interest charges.

Balance transfer cards typically provide introductory periods ranging up to 21 months, albeit with balance transfer fees ranging from 3% to 5% of the transferred amount.

"Arguably, the first two priorities for additional funds should be paying off high-interest debt, such as credit card balances or personal loans, which can save you money on interest payments in the long run, and establishing an emergency fund to cover unexpected expenses like medical bills or car repairs," said Laura Mattia, a certified financial planner in Sarasota, Florida.

People helping with taxes | Getty Images | Photo by Justin Sullivan
ImageSource: Taxes | Getty Images | Photo by Justin Sullivan

When it comes to personal finance, there's never a wrong time to increase your savings, particularly when you have the opportunity to earn favorable interest rates, such as 4% or even 5%, by depositing funds into a high-yield savings account.

For those who haven't yet established an emergency fund to safeguard against unforeseen expenses or financial downturns, your tax refund presents an ideal starting point. 

Optimizing your tax refund for retirement savings is a great financial move. Consider depositing it into a Roth IRA, where your contributions grow tax-free, and withdrawals in retirement are tax-exempt. Make sure you're eligible, as Roth IRAs have income thresholds and contribution limits. For 2024, the cap is $7,000, with a $1,000 catch-up for individuals aged 50 and above.

With the average refund at $3,081, you could contribute $3,919 ($4,919 with catch-up) over the year. This equates to approximately $435 per month for the remaining nine months of 2024.