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The way to use this tax refund to construct credit score

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Every year as you wait for your tax refund you are faced with the same question: what to do with the money when it arrives? For some, the money is used immediately to meet basic needs, but for others it is used for much less important goods.

According to a 2020 survey by Self Financial, 44% the respondent said Not A tax refund this year would completely derail their budget for the rest of the year.

How do you use your tax refund to plan ahead, build your wealth, your financial health, and ultimately your credit?

Here are 5 ways you can use your tax refund to build your bankroll.

But first…

Why should you use your tax refund to build credit?

You may be itching to spend your tax refund to self-medicate. While there's nothing wrong with using a little bit of money for fun, tax refunds are a great opportunity to get your finances going, too.

But why should you focus on your credit of all things?

First, Bad credit could cost you Thousands of dollars more over the course of your life as you are often charged higher interest rates (if you can even get approval). Your bankroll can also affect your ability to rent an apartment, qualify for certain jobs, or even get a cell phone.

However, good credit creates a financial safety net that you can fall back on when needed. Having good credit may make it easier for you to qualify for personal loans, credit cards, or other credit products when you need to borrow money, often at a lower interest rate.

If you don't have an emergency savings fund, credit may be your only other option to rely on when faced with the loss of your job, an unexpected medical emergency, etc.

You need to Build up credit but before you need it. Otherwise, you may not be able to access it when you actually do do need.

5 ways to build credit with your tax refund

Once you have your tax refund in hand, there are several ways you can use it to improve your financial health.

1. Pay off debts

While paying back your mortgage or other personal loan can improve your credit score, it may be a good idea to focus on higher-interest, more expensive consumer debt (like credit card debt) first.

By paying off this higher-interest debt, not only can you save the most money in the long run, but you can also have a greater impact on your creditworthiness. This is because credit usage, or how much of your available balance you are using at any given time, is 30% of your balance FICO® credit score.

While the use of installment loans (like personal loans, auto loans, or home loans) adds something to this factor in your creditworthiness, revolving account balances (like credit cards or HELOCs) count loudly Credit bureau expert Barry Paperno.

That doesn't mean you have to pay off your credit card debt in full to get credit benefits. Even if you repay your balance by 5-10%, it can have a positive effect.

According to the FICO credit scoring agency, those with the highest credit scores tend to have an in-between loan use 6-10% on their revolving credit accounts. While this is a great goal, no matter how small that amount may seem, pay what you can first. Small wins can add up to big wins over time.

Aside from loan use, the only other factor that has a bigger impact on your credit score is your payment history. Which brings me to my next point …

2. Keep your checking accounts in good shape

If you have late or missed payments on your checking account, make those payments when you can. While many lenders report a late payment to the credit bureaus if it is more than 15 days late, delaying your payments can affect your creditworthiness in different ways. Paying 30 days late will affect your score differently than paying 90 days late.

For example, after one FICO score simulationIf you have a credit score of 793 and miss a payment by 30 days, your score can drop 60-80 points. In the same situation, if you miss a payment by 90 days, your score can drop 100 points or more.

The sooner you make up for a late payment, the better. Also, these payments could prevent late fees from adding up.

While catching up on payments may not undo the damage of a late or missed payment on your balance (it can take years for just one late payment to slip off your credit report), it can prevent further damage from being caused.

If the late payments were on real estate or real estate-backed loans such as home loans or car loans, catching up on payments can also keep you from losing your home or car.

3. Open a Credit Builder Account

The next is for people who have either no creditworthiness, limited creditworthiness, or who need to rebuild credit after financial difficulties such as bankruptcy, foreclosure, or identity theft, to name a few.

In contrast to a traditional personal loan Credit Builder Loans Don't give yourself the money in advance.

Instead, the lender keeps the loan amount in a bank account. Every month you deposit into this account and the lender reports your payment history to the credit bureaus, which allows you to compile the credit history.

Once you have paid back the loan amount, the money in the account, minus the interest charged on the loan, will be returned to you. In other words, these loans give you a chance to put some cash on hold for savings while you build up your credit.

If you're having trouble getting access to other credit products or while you're looking to build savings, a Credit Builder account might be the option for you.

4. Use it as a secured card deposit

For many a secured credit card can be a good entry point for accessing credit cards. A secured card works just like a regular credit card, except that you leave a deposit, which is usually equal to your credit limit.

For example, you might have a secured card with a credit limit of $ 100 and a deposit of $ 100. Like a utility deposit, a secured card deposit is used to cover your bill if you fail to repay what you owe.

Some companies (like Self-financially) allow you to slowly prepare for a secured card through a Credit Builder account without the need for an extra deposit or hard request. Bonus: Self doesn't deny you if you've had bankruptcy or foreclosure in the past, unlike some other credit card issuers.

There are many different secured credit cards to choose from. So take a look around to decide which one is right for you.

5. Work with a credit advisor

Not sure where to start when it comes to your bankroll? Or which product might work best for you? You may want to use part of your tax refund to hire a qualified professional to help you come up with a credit action plan.

Here are some reputable places to look for a credit or financial advisor:

National Foundation for Credit Counseling (NFCC). This not-for-profit organization provides financial advisory services through its member organizations in the United States. Visit the company's website to connect with free or inexpensive help in your area.
Association for Financial Advice and Planning Education (AFCPE). AFCPE has over 3,200 certified financial advisors, planners, educators and researchers worldwide. You can find local or virtual financial advice through your online tool.
Operation hope. Operation Hope is a national not-for-profit organization that provides financial coaches to help people “create bespoke action plans to start their own businesses, improve their creditworthiness, buy homes, or just use the money they have, make better decisions ”. Their website also has tons of free resources on financial fundamentals.

These organizations provide access to qualified financial advisors who can help you create plans that align with your financial goals, whether you're building your credit, reducing debt, budgeting, or working towards buying a home, to name a few To give examples.

Depending on your current income and situation, you can also qualify for free or low-cost help as many financial advisors offer tiering based on financial needs.

However, be careful when looking for professional help with your credit, especially if you are looking for a loan repair. While there are some good players in the room, you have to be really careful about choosing the right one. The Federal Trade Commission offers a few guidelines to help you find legitimate credit repair help You can view it here.

Bonus: build an emergency saving

Okay, so this one isn't exactly loan-specific, but an emergency savings fund could help cut down on the amount you need to borrow if you ever have one did must rely on credit in times of financial need.

Research from SaverLife only shows that $ 100- $ 200 Savings can mean the difference between keeping your home safe during troubled times or shutting down your utilities.

According to the IRSThe average tax refund in 2020 was $ 2,741. For people making around $ 30,000, that's roughly the equivalent of a month's salary – pretty healthy cushion when you lose your job and need time to find something new.

The good news is that there are tools out there that you can use to build both loans and some savings at the same time.

Bottom line

While credit isn't usually a priority when you suddenly get cash, it is an important building block for your financial health and can help you open doors to your future.

So if you have a little extra cash, be it thanks to a tax refund, stimulus check, bonus, raise, inheritance, or even just $ 20 in old pants, put that money to work on your future self.

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