Build Credit with Your Tax Refund
Tax refund checks will soon be rolling in, and some of them will likely go to “unnecessary” purchases–that new iPad you’ve been drooling over, or the big party you’ve been wanting to throw. While there is no shame in spending your tax refund however you want, there are ways that you could use that money to build your credit score. Here are some options to build credit with your tax refund.
If you have some outstanding loans, you could use you tax refund to pay them off. You could either choose to make payments on several different loans or pay off one of them completely. Either choice could lead to a higher credit score for you, depending on the status of your debt.
If you are currently using more than 30% of your revolving credit from your credit cards, try paying one of the balances until you get below that mark. This is typically when you start to see improvements on your credit score. On the other hand, if you only owe a little bit of money on several different card accounts, you may consider paying down all of them at the same time.
It may sound silly to get a loan against your own money, but some people do this as a way to boost their credit scores. If you don’t qualify for credit cards or you just don’t trust yourself with them, this could be a great alternative. Ask your bank about CD loans and see if they have any options for you. In most cases, you will be able to take out a CD with the money and get back a certain percentage of it. Then, you will make payments on the “loan” you took out until it is paid back.
You will end up losing money in interest this way, but some of that will be recouped through the interest your CD earns. From a long term perspective, you are basically paying the bank to report your payments to the credit bureau. If you make on-time payments, you will start to improve your credit score. If you decide to cancel the loan at any time, you get whatever is left over in your CD less the cost of outstanding fees or payments. The longer you can keep making on-time payments, the better off you will be.
A secured card is similar to a secured loan, but the money is available like it would be on a credit card. You put your money into an account connected with your card, and then you can spend it as you would with any credit card. At the end of the month, you have to make a minimum payment on the card as you would with a traditional credit card. A secured card functions the same as a regular credit card, but you are the one providing the money for the credit line.
Make sure you select a secured card that reports to a credit bureau so you start to build a history on your credit report. Note that you will pay interest, late fees and other costs on your secured card, even though your money is what is backing it up. This is compensation for the work the card company does to report your payments to the bureau. If you put money on a prepaid card, you do not have to pay those fees, but you won’t build your credit history.
Instead of paying outright for a purchase, you could consider setting up a finance plan on the item. For instance, you might buy your new TV from a store with a finance plan and then put the money for it in a savings account at your bank. You can set up automatic drafts from the account to make the payments, and then you won’t have to worry about using the money and going into debt.
You will pay more for an item if you pay for it this way, but you can also build credit with each payment. Just make sure that the company you are working with does, in fact, report to the credit bureau. For example, some “buy here, pay here” car dealerships do not report to the credit bureaus, and they charge very high interest rates for their car loans. You will end up with a great deal of debt for no reason that way.