A bunch of tax documents and a notepad with the word "taxes" lay on a table under the words "Improving Credit with Tax Returns"

A tax return is like a yearly bonus; It gives you a lump of cash with no obligations tied to it. With a large enough return, most people are eager to buy a treat for themselves – a vacation, a new TV, or a car perhaps. However, one of the best things a person can do with a refund is to use it for credit repair.

Let’s face it – finance in the modern age is hard, and it’s easy to get into financial trouble, which in turn damages your credit history and rating. So what better way to use an uncommitted tax refund than to knock out debt as well as improve your credit score?

Granted, paying off debt may not seem as attractive as buying a new TV, but it’s the best option in the long run. Improved credit due to financial repair can mean less remaining debt, better chances of getting loans, and lower interest rates. It can even make an impact when applying for a new job since many employers are now looking at applicants’ credit histories in addition to their work history. With this in mind, here are three ways that you can use your tax return to improve your credit rating this year:

1. Pay Down Credit Cards and Other Debt

Credit card debt is one of the most damaging types of debt for a credit score. That’s because it’s unsecured debt without collateral, and those who rack up large debts tend to add to those debts rather than get rid of them in the long run.

Using a tax refund to pay off credit cards can result in a big boost for one’s credit score right away. The results are usually seen in about 30 days after credit history records get updated by payment records.

Paying off this debt has a double benefit because it also increases the amount of credit you can take out in the future now that existing card debt is paid off. Credit bureaus like for people to have less credit used than is available to them (also known as a low credit utilization ratio). Get your overall credit utilization below 30 percent of your total credit available and you’ll continue to reap the rewards.

2. Stop the Calls from Debt Collectors

If you’re already struggling with financial problems, you likely have to deal with debt collectors. These agencies are paid to be relentless and will do whatever they can to get a payment out of a person. Fortunately, once the payment is made, the collectors go away. Once the debt is reported as resolved, it will improve your credit score and credit record. When possible, make sure to make payment to the actual entity to whom the debt is owed. Many collectors are third parties and don’t always expedite payment once obtained.

3. Build Reportable Assets and Investments

Your credit score is a report of your entire financial situation, not just your debt. That means assets and income also play a factor in how your credit score is calculated. By putting your tax refund into a savings account or investing it in stocks or a home, you essentially create an asset that is trackable and reportable. This investment will be reported to the credit bureaus and improve your credit rating.

It can be tempting to use the latest tax refund on what seems attractive at the moment. However, when you have a lot of uncommitted funds, it’s one of the best opportunities to improve your credit. And for help with any of these steps or for more help with boosting your credit score, contact Build My Scores today.