How to Use Your Tax Refund to Polish Your Credit

If you’re looking to build credit or help your score recover from past mistakes, a cash infusion can help — especially if you know where to target it for maximum impact.

About half of Americans expect an income tax refund this year, according to a NerdWallet survey of 2,002 U.S. adults conducted by The Harris Poll. Those expecting a refund estimated they will receive $2,207, on average.

A couple thousand can make a big improvement in your finances. Here’s how to use a refund to polish your credit.

Divide up your refund

First, figure out how much of your refund you want to assign toward building credit.

It’s OK not to use every last nickel of your tax refund for responsible, un-fun purposes. Financial coach Rick Zwelling of Right Path Financial Coaching in Columbus, Ohio, recommends a little splurge — perhaps a night on the town. “We don’t want to live in permanent austerity,” he says.

Bruce McClary, vice president of public relations and communications at the National Foundation for Credit Counseling, recommends using about two-thirds of a refund for credit building or debt repayment. Split the remaining money between fun and savings.

Keep in mind, building savings can protect your credit.

McClary points out that many consumers don’t have cash available to cover an unexpected expense of $400. Even a small savings cushion can help handle surprise expenses without running up credit card balances. Keep adding windfalls like tax refunds, raises and bonuses to build enough to cover minimum payments in the event of an emergency like losing your job.

Deploy your credit-building fund

Once you’ve settled on how much to spend on spiffing up credit, you need to figure out how to apply it.

The first step is to check your credit reports for accuracy, say both Zwelling and McClary. You may find an error that’s holding down your score. Request free annual credit reports from the three major credit bureaus by using, then dispute any errors you find.

Your next steps after that depend on whether you’re a credit newbie or have an established history:

If you have established credit

Bring all accounts current. While you’re reviewing your reports, make sure you’re up to date on payments on every account. If not, catching up on late payments is the first priority because these hurt your credit score the most.

Prioritize debt payoff. If you carry balances on credit cards, you can help your credit by whittling them down. Here’s how:

  • Target cards where your balance exceeds 30% of the limit. After paying on time, the next-biggest factor in your credit score is how much of your credit limits you use. McClary recommends keeping all cards under 30% of their limits — and going lower is better for your score. Signing up for a free credit score on a personal finance website is an easy way to see your credit utilization for each card and overall.
  • If you have multiple small balances, you could zap those. Seeing debts disappear can be motivating, Zwelling says. And eliminating small balances on several cards can help your credit.
  • Not carrying balances month to month? Think about reducing the highest-interest debts first. Zwelling says you’ll pay less in overall interest that way.

If you’re a credit newbie

If you’re hoping to use your refund windfall to establish credit, consider a secured credit card. You make a deposit when you apply, and in many cases, your credit limit will be equal to your deposit. Because your deposit cuts the risk to the lender, these are easier to qualify for than unsecured cards.

When choosing a card, check the terms and conditions or call the issuer to verify it will report your account activity to the three major credit bureaus, Equifax, Experian and TransUnion. Also, ask if the issuer will let you “graduate” to an unsecured card after a certain number of on-time payments.

Once you have a secured card, use only a small portion of your credit limit and pay on time. You should have established a FICO credit score in about six months, and a VantageScore much sooner than that.

Avoid common pitfalls

If you have an old debt collection on your credit reports, proceed carefully. Zwelling cautions against paying unless you can pay in full. Otherwise, he says, activity on the account could turn old history into a current problem.

And if you zero out credit card balances, be aware that closing a credit card can hurt your score. That’s because it reduces the average age of your accounts and overall credit limit. If you’re tempted to close an account since you don’t expect to use it again, you may want to reconsider.

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