How Your Tax Refund Can Help Your Score Better Credit

Use your tax refund the right way and it could help build your credit.

If you’re getting a tax refund this year, you’ve got three major options when it comes to using the money: You can save it. You can invest it. Or you can splurge. But break things down a little further, and that check (back) from Uncle Sam can help you build credit, too. For serious.

Here are six ways your tax refund could help you build — or even establish — your credit scores.

1. Pay Down Credit Card Balances

Second rule of credit scores: Keep your debt level below at least 30% (and ideally 10%) of your total available credit. Anything beyond that is bad for your credit utilization ratio. If you’re over that limit or, worse yet, bumping up against your limits, putting your tax refund toward your credit card balances can help improve your credit score. Better yet …

2. Pay Off High-Interest Credit Card Debt

Because those balances are going to spike pretty fast. Plus, you’ll be saving money in the long run. Good rule of thumb when it comes to dealing with multiple credit card balances: Make all your minimums, but put more money toward either the smallest (because motivation) or the one with the highest annual percentage rate (because, like we said, it’ll cost you less). You can see how your credit card use is affecting your credit by viewing two of your scores, updated every 14 days, on Credit.com.

3. Get a Secured Credit Card …

If you’ve got thin-to-no credit, consider using your tax refund to open a secured credit card. Secured credit cards are easier to get than other types of credit cards because they require the cardholder put down a deposit (usually $200 to $300) that serves as the credit line. (Or vice versa. That’s a little bit of a chicken-or-the-egg thing.) In any event, if you’re close to cash-strapped, you can use your tax refund to open the card. That line of credit will help you establish a payment history, the most important factor among credit scores — so long as you pay your charges off by their due date, of course.

4 … Or a Credit-Builder Loan

Credit-builder loans, available at your local bank or credit union, are essentially the installment loan version of a secured credit card. You “borrow” money (that’s where you tax refund comes in), which gets put in a savings account, then you make a series of monthly payments and get access to the money once the “loan” is paid in full. Credit-builder loans usually involve paying some interest on the money you’re borrowing/depositing, but they basically provide people who otherwise don’t have credit with the opportunity to build some.

5. Pay Off That Collections Account

OK, here’s the thing: Paying a collection account probably won’t get that item off of your credit report. Legally, it can stay there for seven years plus 180 days from the date of the delinquency that immediately preceded collection activity (more on how long other stuff stays on your credit report right here). And there’s no guarantee it’ll boost your score once it’s paid off.

Still, most credit scoring models treat paid collections differently than unpaid ones (they tend to carry less weight) and the newest scores actually ignore paid collections entirely. Plus, some collectors are changing their tune when it comes to pay for removal deals and immediately reporting the account to the credit bureaus.

Quick side note: We’re talking about legitimate collection accounts here, so if a collector comes calling, be sure to verify the account belongs to you. There are debt collection scammers out there and it’s not unheard of for a legitimate collector to get the wrong guy. Under federal law, collectors are required to send written verification of a debt to a debtor five days after first contact, so that slip of paper should give you an idea of whether you’re liable for the payment.

6. Start an Emergency Fund

Yeah, we know, money in a savings account isn’t going to do anything for your credit score … right now. But socking away some dollars for a rainy day can keep you from going to the old credit card when one comes. And that’ll keep your credit utilization on the right side of 30%. Plus, you’ll skip the interest. If you’re not carrying any debt and your credit is in OK shape, consider putting Uncle Sam’s check in a high or at least higher-yield savings account. Your credit score may thank you down the line.

Not getting a tax refund this year? No worries, we’ve got more ways you can fix your credit here.

Got more questions about building credit? Ask away in the comments section and one of our experts will try to help!

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Can I Fix My Credit in a Week?

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If you’re getting ready to apply for a car loan, mortgage or credit card, you may have heard it’s a good idea to check your credit before doing so. But, waiting until the last minute to check your credit before applying may have you surprised — if you find you have low credit scores for any number of reasons, you may be wondering just how quickly you can fix your credit.

“Unfortunately, there are no quick fixes for credit because it took time for this problem to arise and it generally takes much more than a week to resolve it,” John Heath, a credit expert and consumer attorney for Lexington Law, a Credit.com affiliate, said in an email.

Timing Is Everything

Credit scores are based on information in your credit files, which includes new data about how you handle your accounts reported by your creditors every month, according to Jeff Richardson, a spokesperson for VantageScore Solutions.

This monthly reporting date differs from lender to lender and the monthly date your credit scores update also differs depending on the reporting bureau, which is one of many reasons the cycle for fixing your credit may take more than 30 days, Richardson said.

Another example of timing limitations arises when you attempt to fix your credit by disputing errors on your credit reports, according to Heath. These disputes may include a current account, collection, bankruptcy, public record, tax lien or late payment that can’t be substantiated, isn’t yours, is inaccurately reported or is outdated.

“One of the major rules of the Fair Credit Reporting Act grants the credit reporting agencies 30 days to review your challenges to items on the credit report,” Heath said.

According to a 2012 VantageScore report, showing the impact of different positive and negative credit behaviors, you can typically improve your credit scores by 10 to 15 points within a few months with simple credit management techniques such as paying bills on time and paying down debt. For larger score improvements, it can take even longer depending on your specific credit report and account history.

Credit Fixes Accomplished in 30 Days

In general, the negative score impact of running up the balances on your credit cards can usually be corrected by a payoff the next month, according to Richardson.

“Pay down the balance all the way to zero, or at least under 30% of your total available credit, and you may see a credit score bump back up the next month, so long as there are no other negative credit events on your report,” he said.

Again, depending on timing, there might be one way you might improve your credit score in one week, according to Richardson.

“A score increase or decrease will depend upon when the lenders update your file,” Richardson said. “If you can find out when, say, a credit card issuer is reporting to the credit bureaus and reduce your balance significantly beforehand it is possible to see a score increase in a short time period.”

He favors taking a longer view of your credit health and improving your credit before you need to apply for any new credit, if possible.

Heath said you could spend one week reviewing your credit reports thoroughly making sure you recognize all the listings on the report and creating a budget that assures timely payments. Both of these actions, easily completed in one week, go a long way toward improving your credit in the long run.

No matter what steps you take to improve your credit scores — whether it’s to repair errors you discover or simply improve your habits — it’s important to note that these are things you can do on your own. There are also professional credit repair experts who are available to help you, but opting to turn to one for help is not essential.

If you are unsure where your credit currently stands, you can view two of your credit scores for free, updated ever 14 days, on Credit.com.

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Can Improving Your Credit Actually Be Fun?

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Your credit is one of the most important things in your life. Just like you might use your blood pressure or body weight as an indicator of your physical health, your credit (including your credit report and credit score) is an indicator of your financial health.

But there’s a problem: People often don’t like talking or thinking about their finances. Sure, we all like spending money, but there can be a lot of mental anguish associated with activities like balancing your household budget or checking your credit scores. So, when people come to me and ask me how they can “fix” their credit scores, they might be wishing for an instant, magic, quick-fix pill. In reality, there are only patient, persistent steps to take to repair credit.

Fortunately, this doesn’t mean credit can’t be fun. While some people might think that pulling and reviewing your credit reports is boring, it can be turned into a great time. Here are some suggestions to make credit repair a fun activity.

1. Pick a Credit Score Repair Day

Although there is a benefit to working bit-by-bit on your credit every day, it can also be fun to set aside a special Credit Score Repair Day for deeper dives. Wear comfy clothes, put on your favorite music, and have a one-person “credit party” where you review your reports line by line for errors or improvement opportunities.

2. Make This Day a Family Event

Mark it on the calendar and have everyone in your family who is old enough to have credit pull their reports and view their scores at the same time. (You can get your reports for free each year at AnnualCreditReport.com and view your scores for free each month on Credit.com.) On your family’s Credit Score Repair Day, order pizza and beverages, sit at the kitchen table and conduct your credit checks together.

At the end of the day, reward yourselves with a family fun time — perhaps a game or a favorite family movie. When you check your credit to see how any changes you made have impacted your scores, you can award a prize to the person with the largest gain.

3. Give Yourself a Prize for Every Error You Find

Pick up your favorite candy (or some other small treat) from the store and put it in a bowl. Then scour your credit reports for errors. (They’re more common than you think — you can go here to find out why errors appear on credit reports.) Every time you find one, give yourself a candy. Then follow up by disputing these errors with the credit bureau in question.

4. Get Your Kids Involved

Your children might enjoy sitting down with you (doing “grown-up stuff!”) and reviewing some basic information. For example, you might have them check your report for the correct spelling of your name, accurate addresses or some other simple task. You’ll want to review their work, of course, but a second set of eyes is always helpful — plus you’ll be teaching your kids valuable credit score lessons.

5. Reward Yourself

After you’ve worked on your credit reports, submitted any corrections to the credit reporting agencies, or successfully improved your scores, give yourself a little reward for a job well done. (Just make sure this reward doesn’t break your budget!) And, remember, you can generally build and maintain good credit scores by making all of your payments on time, keeping credit card balances low and adding new lines organically over time.

More on Credit Reports & Credit Scores:

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3 Smart Ways to Use Your Raise

The only thing better than a payday is a payday that comes with a bigger paycheck. They might not happen often, so when a raise comes your way, it’s hard to not get a little excited.

With that excitement often comes an urge to spend more, even if you don’t need to. This is sometimes called lifestyle inflation — people spend more as they earn more, while failing to re-evaluate their savings and other financial goals. So when you get that occasional bump in income, take some time to decide what you should do with it. Here are some ideas for making the most out of a raise.

1. Pretend You Didn’t Get It

Do you want to save more? One of the easiest ways to do that is to make more money. At least, it tends to be easier than the alternative: spending less. If your expenses stay about the same but your income goes up, keep the same budget you had before, and push the leftover money into a savings account.

Getting a raise is often a good time to revisit your budget so you can identify any regular costs you may want to cut, like a subscription you’re not using or insurance premium you could reduce by modifying your coverage or changing insurers. Reducing your expenses and increasing your income can significantly improve your financial stability if you put your surplus toward an emergency fund or retirement plan.

2. Do Something You’ve Been Putting Off

Think about ways you’ve wanted to improve your well-being but couldn’t previously afford. This could be anything from an overdue home improvement to a long-desired treat, and a bit of extra monthly income could help you get it. Sure, replacing your car’s tires may not be as exciting as getting a new TV, but try to think of purchases that could help you save money in the long run before splurging on something you might not need for a while. Ideally, you could do a little bit of both as your higher paychecks continue to roll in.

3. Pay Off More Debt

Most people in debt have something in common: They want to get out of it. A pay raise can help you accelerate that process. Say you have $2,000 of credit card debt with a 15% APR (about the average credit card interest rate), and you’re currently paying $100 a month to get rid of it. If you use your raise to add another $100 and bump your monthly payment to $200, you’ll be out of debt roughly a year sooner and save about $166 in interest. You can use our credit card payoff calculator to see how higher payments can shorten your debt-free timeline and save you money on your debt.

It’s your raise — do with it what you want — and remember you don’t have to do just one thing with it. You can save a little, spend a little and throw a little at your debt, because these can all be positive moves. If you’re trying to improve your credit, remember that paying down debt (credit card debt in particular) can help your credit scores. You can see how credit card spending affects your scores with the two free credit scores you get once a month on Credit.com.

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