How to Build Credit With a Tax Refund
Do you get a fantastic tax refund every year and find something fun to do with it? Who could blame you? Tax refunds are a great way to improve your life temporarily and have fun doing things you couldn't usually afford. However, there are better ways you can use this money. For example, learning how to build credit with a tax refund can improve your life by making your credit score better.
With a higher credit score, you'll get better interest rates on loans and may even qualify for unique credit options, such as black credit cards that you can't get otherwise. Thankfully, it isn't too hard to improve your credit score by using your tax refund. Here's what you need to know about this process, including vital information about tax refund and why it pays to use it for your credit refund.
Why People Get Tax Refunds?
People who get tax refunds often think of them as a type of “free money” without realizing that it is simply money that is owed to them. You get tax refunds when you pay too much into taxes every year, a common situation for most people. However, some people deliberately pay too much money to get a tax refund at the end of the year, which is a little counterintuitive. After all, if you didn't pay it, you'd have it in your paycheck.
However, it makes sense when thinking of it from an investment perspective. People often use their tax refunds to fund various investments, such as buying cryptocurrency, stock, or other big-money purchases. Others simply use it to plan vacations, fix their home, or perform other life improvements. Even more importantly, you can use various tax credits to increase your refund, including:
Child Tax Credit:
People with dependent children can get up to $2,000 in tax credits, though President Biden signed a law that increased this amount to $3,600 in the face of COVID-19. Whether this change will remain permanent is unknown. However, you will get an increased tax refund if you qualify.
Earned Income Tax Credit:
People who make a low-to-moderate income may qualify for earned income tax credits, which decrease how much they owe in taxes. You may even get a refund or a bigger refund if the reduction is high enough compared to your income.
The American Opportunity Tax Credit:
This tax credit helps offset higher education costs and is worth around $2,500 in tax credits. When this credit drops your tax liability to zero, you get a refund of 40% of the remaining credit amount or up to $1,000.
In the rare situation that you qualify for all of these tax credits or more, your refund will increase further. You can then use that extra refund money to improve your life in any way that you see fit. This process could involve working tightly with a tax professional to understand your refund options better and taking the time to balance your expectations with the reality of your earned credits.
Benefits Of Using a Tax Refund To Build Credit
While there are other ways you can fund your credit improvement project, using your tax refund is a wise decision. Rather than spending it spuriously or without making a plan, you can instead focus on your credit and receive many benefits. Paying into your credit improvement with your tax refund:
Provides Short-Term Benefits
Using your tax refund to build your credit helps in the short term by letting you make lump payments on various debts. Paying off these debts will immediately improve your credit score and help you financially in many different ways.
Helps You Over the Long Term
Those who qualify for a tax refund may improve their long-term financial forecast by handling more significant payments, such as setting up automatic car payments with their tax refund, that keeps their costs on time and minimizes late fees and credit hits.
Makes Self-Investment Easier
When you get your tax refund check, you can put it directly in your bank account without delay. You can then use this money for your self-improvement projects, such as paying off credit card debt or managing other debt-related problems.
Minimizes Your Financial Struggles
While getting a loan or grant to improve your credit can be a wise choice, using your tax refund is much easier. You don't have to qualify for a loan or make any payments. Instead, you simply take your tax refund and invest it in your financial future.
As you can see, using a tax refund to improve your credit is a wise decision, one that will pay you back many dividends over the years. If you're willing to take these steps, you'll improve your overall life and balance your financial struggles in a way that makes sense for your needs.
Just as significantly, you can expand your financial situation and invest in yourself in other ways. For example, getting a better credit score should make buying a better house or finding a car with improved interest rates. These benefits can make your life better and minimize stress and anxiety.
However, it is also essential to know how to follow these steps properly because there are many mistakes you may end up making. By better understanding these methods by following the step-by-step guide below, you should improve your credit by finding the best investment options with your tax refund.
How to Build Credit With a Tax Refund: A Step-By-Step Guide
The following steps are all things you can do to improve your credit using your tax refund. Start at the top and pay as much as possible in the first step. Then, pay the rest of your money off through the proceeding steps. Starting at the top is important because higher steps on this list address more pressing issues. This process may take multiple years depending on your financial health, but it is a wise investment.
1. Start By Paying Your Debt
Debt is by far the most significant impact on your credit, and having multiple, big debt problems will impact your score in many problematic ways. Typically, credit companies rate you hard if your credit utilization is above 30% and give top scores when it is below 7%. As a result, it is essential to follow these steps to bring down your debt using your tax refund and improve your overall credit situation:
Rate Debts By Size and Interest:
Start by arranging your debts by size and interest rates. You typically want to pay off smaller debts first to get them off your credit but also want to focus on higher-interest payments to help improve your overall financial health.
Pay Off Smaller Debts First:
Do you have a debt that you can pay off entirely using some or all of your tax refund? Start here first. Getting that debt off your credit score can cause an immediate 20-30 point boost, depending on the size of the debt and its length on your account.
Cut Down on Bigger Debts:
If you don't have any smaller debts that you can pay off with your tax refund, pay off as much as you can on significant debt. Focus on those more significant debts with higher interest rates first. You can also split your payments between a few debts to help out here.
Consider Refinancing:
You can also use your tax refund to help pay for refinancing your debt into a single payment option. This step is innovative because it minimizes your payment costs and helps make it simpler for you to pay off your debt with minimal challenges.
These simple steps should improve your credit score by cutting down your debt and minimizing how much you owe. Just as significantly, it can help prepare you for later stages and make your financial recovery much more accessible. Paying these charges down will help slowly improve your credit score and give you the overall help that you need to restore your credit to a better and more balanced level.
2. Pay Off Late Payments
Once you've paid off your debts, it is also essential to make any late payments and catch up on this situation as much as possible. While you probably paid off many of these late payments when paying off your overall debt, you may have some late payments lingering if you didn't pay off your whole debt. In this situation, focus on your delinquent payments first and then move to other debt situations.
If you can catch these late payments before 30 days have expired, you can often avoid getting these payments reported to a collection account.
That's a great benefit because your score will take a big hit when your debt goes to collections. However, even paying it off immediately may cause a lingering problem with your credit score, as it may take months for these payments to come off your report.
3. Apply for a Secured Credit Card
After you've paid off your debt and got your finances in order, you may want to apply for a secured credit card. These cards include a security deposit that you can pay as collateral to the card. The money you pay is typically your limit, meaning these cards may work a bit like a debit card. However, you do get interest payments on these amounts, so make sure you stay on top of these payments when getting one.
You can use your tax refund to pay for one of these cards, creating a reasonable limit that you can use to buy various items. Some people make all their payments on a credit card in this way and then pay it off at the end of the month. This step helps you track your expenses more easily and makes it easier to build credit. Paying for one with your tax refund may help you set up a reasonably large limit, as well.
Typically, you want to avoid having any credit on your card at the end of the month because this helps increase your tax score by providing on-time payments that slowly rebuild your credit and show you're a trustworthy financial investment. It can also provide you with an emergency option if you need help with medical payments or home repairs after a disaster.
4. Create an Emergency Fund
After you've handled all these steps and if you have any money left in your tax refund, start saving up for emergencies. You may take this step a few years after you handle the others because you'll have stronger financial health and more ability to pay. In addition, an emergency fund can help pay for things like medical emergencies and other problems that may occur throughout your life.
If you don't have insurance or want extra financial help for medical emergencies, consider putting your tax refund into a medical savings account. These accounts are not taxed, and you can put as much money in them as you want. They slowly grow with time and can provide you with a great place to put your money, protect it from taxes, and provide your family with more medical funding.
Other people may take their tax refunds and put them right into their 401(k) to help fund their retirement. This intelligent option can help you more easily plan for your late-life care and give you more money to handle your retirement demands.
You may want to work with your financial adviser on these investments to ensure that you choose the best investment options for your needs.
Getting Help With This Process
If you aren't sure where to turn to get help handling this process, it is vital to reach out to someone who can help. Lenders are a significant first step because they can provide you with the cash you need. In addition, some people work with a lender by using their tax refund as a downpayment and consolidating their debt into a single payment that is simpler to pay and more efficient.
When seeking out a lender who can help you with this process, it is essential to pay attention to various traits about that lender that make them a good choice for your needs. Not every lender will be appropriate for every borrower, and picking the wrong option may complicate your process.
Here are a few traits to seek out when choosing a lender who can help you:
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Lenders with a transparent and easy-to-understand approval process are always a great option. Any lender who makes application difficult or who isn't willing to work with you when creating a loan is frustrating and must be avoided.
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Some lenders set relatively high-interest rates when working with people to improve their credit. These interest rates may be hard for some people to tolerate, so it is vital to work with a team that can set up better interest rates that suit your needs and which aren't too high.
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Do you know what kind of loan you want for your credit improvement process? Then talk to a lender who can provide it for you. Some lenders work on specific loan types and will give you the help that you need to find funding for your particular loan type.
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Pay attention to the friendliness of each lending office's professionals, paying attention to how well they are to work to meet your needs. If they engage with you and provide friendly service, this team is worth working with for your financial needs.
When still struggling to understand your options or when you feel like you need help handling this process, reach out to us at Goalry today. Our team of professionals can help you identify a lender who works for your needs.
Please note that we're not a lender and cannot give you money. Instead, we provide a simple platform that makes finding a financial team that suits you easier.
Our platform includes a search option that lets you seek out various lenders with the traits that you define. You can find their interest rates loan amounts and get contact information that helps through the lending process. Other benefits include a simple profile you can set up that makes it easier to save your searches and come back to them later if you still need more information.
As you can see, Goalry can provide many benefits when used as a supplement to your borrowing process. Our team is always willing to work directly with you to help you better find a lender and get the experience that you want and deserve. So download our app, set up your profile, and search today. You won't regret taking the time to handle these simple but effective steps.
Take Finances Into Your Own Hands.
Take Control of Your Credit
Now that you know how to build credit with a tax refund, you can take the money you get from this year and invest it in yourself. Of course, it's tempting to take this money and buy something big. Who could blame you? But instead of taking a vacation or buying a new big-screen television, take better control of your credit and set yourself up for more significant purchases with higher-quality credit scores.