Tax season is upon us, and for many, it brings the welcome relief of a tax refund. According to the IRS, the average tax refund during the 2024 filing season is $3,145. This windfall presents a golden opportunity to improve your financial health, particularly your credit score. At O1ne Mortgage, we believe in empowering our clients with the knowledge to make smart financial decisions. Here’s how you can use your tax refund to boost your credit score and achieve financial stability.

1. Pay Down Debt

One of the most effective ways to improve your credit score is by paying down debt. Your credit utilization ratio, which is the percentage of available credit you’re using, plays a significant role in determining your credit score. Experts recommend keeping this ratio below 30%, but those with the highest credit scores often keep it in the low single digits. Use a portion of your tax refund to pay off outstanding credit card or home equity line of credit (HELOC) debt, and keep your utilization low going forward.

2. Catch Up on Late Payments

If you’ve recently missed a credit card or loan payment, your tax refund can help you catch up and avoid a hit to your credit score. Credit card issuers typically don’t report late payments to the credit bureaus until a full billing cycle, or about 30 days, has elapsed. Use your tax refund to make a payment before those 30 days are up, and you may avoid a late payment appearing on your credit report. Remember, payment history is the most important factor in your credit score.

3. Apply for a Secured Credit Card

A tax refund can give you the flexibility to open a secured credit card, which can help you establish or rebuild your credit history with regular, on-time payments. Secured cards require a refundable security deposit that may also become your credit limit. Responsible use of a secured card can help you build a positive credit history, as issuers typically report your payment history to one or more of the three major credit bureaus.

4. Open a Credit-Builder Account

Another way to use your tax refund to improve your credit is by opening a credit-builder loan. This type of loan operates as a savings account that you make regular payments toward. As you pay off the “loan,” the money you’ve paid will be there for you as savings at the end of the term. Since your payments are reported to the credit bureaus, you’ll also have a new series of on-time payments on your credit report.

5. Build an Emergency Fund

Starting or growing a savings account for emergencies won’t have an immediate effect on your credit score, but it will safeguard your score from the effects of going into debt to cover unforeseen expenses. A healthy emergency fund generally covers three to six months of basic expenses. Your tax refund can give you a jump start on your savings account, and you can contribute a small amount monthly thereafter to hit your goal.

Other Ways to Improve Your Credit Score

In addition to using your tax refund, consider these strategies to improve your credit score:

• Set up autopay for bill payments: To avoid missing credit card or loan payments, set up automatic payments with the issuer or lender.
• Become an authorized user on a credit card: Ask a trusted friend or family member to add you to their credit card account as an authorized user.
• Think twice before canceling old credit cards: Closing a long-standing credit card account can negatively impact your credit score.
• Add positive payment history to your credit report: Use a feature like Experian Boost® to add on-time utility, cellphone, insurance, and rent payments to your credit file.

The Bottom Line

While it’s a good idea to treat yourself and spend at least part of your tax refund on something you enjoy, a refund has the potential to help you make progress on financial goals that would have been difficult to achieve otherwise. Strong credit is one of the most powerful financial tools at your disposal. Make improving it your focus at tax time.

For expert mortgage services and advice on how to use your tax refund to improve your financial health, contact O1ne Mortgage at 213-732-3074. Our team is here to help you achieve your financial goals and secure the best mortgage options available.