How Your Tax Refund Could Improve Your Credit Score

When you get a tax refund, you might consider spending it on yourself. However, tax refunds are a great way to improve your credit score. There are ways you can spend your tax refund and get cashback and rewards that will simultaneously increase your credit score.

You need a good credit score for everything, including applying for a loan or a credit card. So, you should increase your credit score.

Want to know more about how to improve your credit score with a tax refund? We've got you covered. Read on to explore different ways tax refunds can enhance your credit score.

How to Increase Your Credit Score with a Tax Refund?

Listed below are some ways you can use your tax refund to improve your credit score:

Use Your Tax Refund as Security Deposit for Your Secured Credit Card

A secured credit card is quite different from a traditional credit card. Such a credit card can improve your CIBIL for credit card score and your credit history. However, you should provide a security deposit as collateral to get the best secured credit card in India.

You can use your tax refund as a security deposit for your secured credit card. Then, you can use the card to make purchases, help build credit, and earn cashback bonuses, which will, in turn, help increase your credit score. This way, your tax refund can improve your credit score.

Pay off Credit Card Debt with High Interest with Your Tax Refund

Using your tax refund to pay your credit card debt is one of the best ways to enhance your credit scores. Using your tax refund to pay off your credit card debt will also help decrease the credit utilisation ratio. This ratio plays a major role in enhancing your credit score.

If you have multiple credit cards, ensure that you pay off the debts of the ones with high interest with your tax refund. This way, you will benefit from saving money on credit card interest rates.

Use Your Tax Refund as Collateral for a Secured Loan

A secured loan is backed by collateral, i.e., financial assets you own, for example - a car or a house. If your credit scores are low and you fail to meet the criteria for an unsecured loan, you can always apply for a secured loan using your tax refund as collateral. If you get it and pay it back at one time, it can boost your credit score.

Pay for Purchases in Cash with Your Tax Refund

You do not always need your credit card to build credit. If you have large payments, you can use your tax refund to make the payment upfront, resulting in a low credit utilisation rate and lessening the risk of ruining your credit history and harming your credit.

Pay Off Late Payments with Your Tax Refund

Making late payments on your bills can hurt your credit score. If you are behind on payments, catching up can help you improve your score. You can use your tax refund to pay off all your late payments.

Usually, credit card issuers do not report late payments to credit bureaus till 30 days. Late payments can affect your credit score. So, you can use your tax refund to pay off your payments within 30 days of the billing cycle to avoid the late payment appearing on your credit report.

Build an Emergency Fund with Your Tax Refund

A good credit score helps you get approved for loans and lines of credit. It can even help you get a lower interest rate. You can create an emergency fund to help you cover your expenses. A strong emergency fund will help you cover at least three to six months of your basic expenses.

If you have an emergency fund, you're less likely to rely on credit to cover unexpected expenses. It can help you avoid missed payments, late payments, and other negative marks on your credit report. An emergency fund can help you avoid tapping into your credit limit, which can hurt your credit score.

A tax refund will help you give your emergency fund a kickstart. Once you have opened a bank account to store your emergency fund, you can contribute a small amount frequently to reach your monthly goals.

Of course, an emergency fund can't guarantee a perfect credit score. But it can help you avoid pitfalls leading to a lower score. Building an emergency fund should be one of your top priorities if you're looking to score better credit.

Conclusion 

Tax season is in full swing, and if you're one of those who have already filed your taxes, you may have already gotten your tax refund. You can use the techniques mentioned above to use your tax refund to improve your credit score and enhance your credit history.

​# This is a guest article authored by Kotak Mahindra Bank. For any enquiries or details, you can visit the author's website.