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.
This article originally appeared on Credit.com.
You don't need great credit to help your kid get a credit card
Virginia C. McGuire, NerdWallet 7:02 a.m. ET March 20, 2017
Even if your child is an authorized user, you’re still the primary account holder, which means you’re responsible for the bills. And your child could damage your credit and his or her own by charging more than the limit.(Photo: Getty Images/iStockphoto)
Parents with less-than-perfect credit: You can still help your teenager or young adult child get a credit card and start building a strong credit history.
You might not be able to co-sign on a credit card application if your own credit history is rough — but nowadays, most major issuers don't accept co-signers, anyway. There are other ways to help your child access credit and learn to use it responsibly.
Your credit history isn’t shared
Let’s make one thing clear: Your credit history and scores are yours alone. A person who shares an account with you shares only the history tied to that particular account. Spouses each have individual credit histories and scores, even if they share some accounts. The same goes for parents and children.
That’s why you don’t need perfect credit to give your child a leg up — you just need one credit card account in good standing. You can add your child to that account as an authorized user no matter what the rest of your credit history looks like.
The ideal account to share looks like this:
A few words of caution: Even if your child is an authorized user, you’re still the primary account holder, which means you’re responsible for the bills. And your child could damage your credit and his or her own by charging more than the limit. It’s up to you to set spending limits and clear expectations about whether and how you’ll be paid back for purchases.
After gaining some authorized user experience as a teenager, your child can eventually get approved for a solo credit card. Eighteen-year-olds can qualify for their own accounts if they demonstrate significant income. Once your child turns 21, it’ll be easier for him or her to get approved for a student credit card.
If you don’t have a card in good standing
Let’s say you don’t have a credit card account at all, or the ones you have are a bit tarnished. It won’t help your child to be added to an account with late payments, a high balance or that’s currently in default.
But you can still get your child started with credit by helping him or her apply for a secured credit card. These require a cash deposit, which is usually equal to the credit limit. Look for a secured card with low fees that allows users to transition to unsecured credit cards in the future.
Once he or she has become an authorized user or gotten a secured credit card, your child will need to build good credit over time, just like an adult. That means developing good financial habits so he or she doesn’t overspend. You can recommend books or classes if you don’t feel comfortable teaching these skills yourself. That also means keeping credit card balances low relative to available credit, keeping older accounts open and always — always — paying the bill on time.
MORE:
How to build credit
NerdWallet’s best secured credit credit cards
Should you make your teen an authorized user?
Virginia C. McGuire is a staff writer at NerdWallet, a personal finance website. Email: virginia@nerdwallet.com. Twitter: @vcmcguire.
NerdWallet is a USA TODAY content partner providing general news, commentary and coverage from around the web. Its content is produced independently of USA TODAY.
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