An individual who pays more taxes in advance throughout the year can expect a tax refund at the end of the year. People who expect a tax refund start planning their expenses from the money in advance. Usually, it is a fun vacation or to buy an expensive gadget. However, your tax refunds apply for credit card which helps you build your credit score.
A tax refund is a golden opportunity to manage your finances better and create a strategy for a high credit score. A stronger credit score can help an individual qualify for loans of higher amounts at a lower interest rate. Here is how you can build a credit score and get cashback using your tax refund.
What is the Need to Improve Credit
A person can get several benefits if their credit score is well-maintained.
- Better credit history gets you higher amounts. Banks offer loans at lower interest rates to people with good credit scores.
- People with good credit scores can get an unsecured line of credit easily.
- A good credit history will fetch easy approvals from landlords for residential and commercial properties. The landlord may expect a lower security deposit from a person with a good credit history.
- A good credit history can help a person get a car, medical, and other forms of insurance at lower interest rates.
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How to Build a Credit Score and Get Cashback With a Tax Refund
Individuals can use their tax refund wisely to get a secured credit card. A secured credit card is provided based on the amount of money the individual has as a security deposit against the credit card. A person can use a tax refund as a security deposit against a secured credit card and then use the credit card to make purchases. These purchases will fetch them reward points and cashback.
When an individual opens a secured credit card using a tax refund, the deposited amount acts as collateral in case of a payment default. The credit card issuer decides the credit card limit of such a credit card based on the security deposit amount.
A secured credit card has similar functions as a debit card. However, unlike a debit card, it lets you improve your credit score. A cardholder who regularly makes credit card payments over time can get an unsecured credit card.
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How to Build a Credit Score Using a Secured Credit Card
Individuals with no credit history or bad credit can build or rebuild their credit history and increase their credit score through a secured credit card. Banks offer secured credit cards to such individuals because they have the security of the cardholder’s deposit in case of default.
Over time, he had a positive credit history and built up his credit score. Some positive credit-building habits that every credit cardholder can follow are:
- Pay the credit card bill on time regularly.
- Increase the frequency of credit card usage
- Increase the limit of the credit card with time
- Not using the credit card to its maximum limit.
You can use your secured credit card to make daily purchases like groceries to earn rewards and cashback and improve credit.
Other Ways of Building Credit Score With Tax Refunds
While getting a secured credit card with surplus funds is the wisest way of building credit, there are other ways too to build your credit, such as using the tax refund money.
A person may have one or more debts in his name, like a loan or a credit card bill. Well, in that case, they can use the surplus funds to pay off such debts.
Paying off the highest interest rate debt significantly reduces individual financial burdens. Since the interest rate on credit card debts is high, one can consider paying off a credit card debt using this additional money. It will also help improve the credit score and write off debt from one’s credit history.
Paying off the credit card balance is also a smart way of improving credit. According to experts, the credit card utilisation ratio should ideally be less than 30%. If you have exceeded your credit card utilisation beyond this limit, you can use the tax refund money to lower your credit card utilisation.
Paying off a credit card debt and keeping the credit card utilisation within a reasonable limit will give you an additional boost to your credit score.
One can take up the habit of paying more than the minimum amount due in the credit card to maintain a good credit history and build a strong credit score over time.
