Ah, spring…..as you watch the trees and flowers begin to blossom, your thoughts turn to warmer weather and the arrival of your income tax refund check. Perhaps you have already made plans to spend those funds on a home improvement project or a luxurious weekend getaway. Why not spend that money getting your credit in shape? A higher credit score can provide you with opportunities like the ability to obtain financing to buy a new home or a new car. It can also save you money throughout the year on your insurance premiums and credit card interest rate.
How can the proceeds from your tax refund help to boost your credit score? Here are five suggestions:
- Get a Copy of Your Credit Report
The very first thing that you should do is to obtain a current and complete copy of your credit report. There are a number of ways to do this, from ordering one apiece from each credit bureau, or from myFICO.com. Here’s a bonus for those of you who didn’t get a refund this year, but for some reason are reading this article anyway: By law, you are entitled to a free copy of your credit report every 12 months; a great site for this is https://www.annualcreditreport.com/index.action.
Be certain that the report you obtain has information from all three of the credit bureaus (Experian, Transunion and Equifax). There’s a chance that something is being negatively reported on one of those three, but not on the other two.
Why start with your credit report? It’s the best way to tell what, if any, negative items are being reported against you. Read it carefully – you would be amazed at the number of credit reports that contain inaccurate information.
- Pay Down Your Credit Card Balances
Credit utilization is the factor that is given the second most importance in determining your credit score. It accounts for slightly less than a third of that score. Credit Utilization means that you use credit, but you use it responsibly. This part of your score suffers if you don’t use credit at all, it also suffers if you use too much credit and don’t pay it back in a timely and responsible manner.
Ideally, the credit scoring formula looks for credit utilization to be 30% of that card’s limit or less. So, take some or all of your refund money and pay down any credit cards you have where the balance is in excess of 30% of that card’s limit to a point where it is under that level. Do so, and you can expect to see an increase in your credit score in a very short time.
As an extra added benefit, owing less on your credit cards also means that it is less likely that you will have difficulty paying your monthly bills for those cards on time moving forward.
- Get and Fund a Secured Credit Card
Believe it or not, there are people out there who do not have a single credit score reporting, or alternatively, do not have a credit score reporting from one or two of the three credit reporting bureaus. These people don’t necessarily have a single item that is reporting negatively on their credit history, they are simply “credit invisible.”
Why are they invisible to the credit bureaus? Because they have never applied for nor utilized credit.
One of the easiest and best ways to become visible to the credit bureaus is to apply for and fund a “secured” credit card. Secured cards are guaranteed by a deposit that you make with the bank where you acquire the card. Your credit limit, typically, is equal to the amount that you fund the card with.
Secured credit cards can also help to build credit for individuals that aren’t “credit invisible”, but have damaged or low credit scores.
There are a wide variety of secured credit cards available, and the amount of money that you are required to fund those cards with varies widely, from a few hundred dollars to a few thousand dollars. The cost of these cards, in addition to the required deposit, can also vary widely, so shop around and be certain that you understand what you are paying for with this credit card.
If you obtain a secured card, it is crucially important that you use it properly in order to build your credit score. It is also important that the card you elect to obtain reports to the credit bureaus as often as possible.
- Pay Off Accounts that are in Collection
How nice would it be to stop that annoying collection agency from calling you about some old bill that you were unable to pay several years ago? Getting those calls to stop is another great way to use your tax refund, by paying off or settling those obligations. It may also help to boost your credit score.
Be careful when dealing with old debts, as sometimes paying them off can retrigger statutes of limitations that might be about to expire. Statutes of limitations are the time period, set by state law, for which a creditor can sue in court for an unpaid debt. They vary from state to state, so be sure that you know the applicable limitations for your state. By partially paying a debt or entering into a payment plan, it’s possible that you may ‘restart’ the statute of limitations all over, even if the debt has been previously barred by the expiration of said time limitations.
You also need to be aware of the time limits for how long a collection account can legally be reported on your credit history. The Fair Credit Reporting Act, a Federal law, only allows collection accounts to be reported for seven and one half years (technically, it’s seven years plus 180 days, but we’ll round down slightly for our discussion here). This restriction is different than the statute of limitations. Depending upon the state law that applies, it may be longer or shorter than the time within which a creditor can sue you.
If an account is nearly seven and a half years old, paying it off may not be the best use of your tax refund, at least when it comes to boosting your credit score. That money may likely be better spent elsewhere. Be sure to look at how long a collection has been reporting.
Generally, whether you pay an account in full or enter into an agreement with the collection agency to settle the account for less, doesn’t make a difference in your credit score. Accordingly, feel free to try out the negotiating skills you have learned from watching “Shark Tank” when you place a call to the collection agency.
Finally, be aware that paying off an old account doesn’t necessarily mean that it will be removed from your credit report. Some credit scoring models will boost your score for paying off these types of debt, but most of them don’t.
- Hire a Qualified Professional Credit Restoration Company
You can attempt to fix damaged credit issues on your own. You can also attempt to change your own oil in your car and cut your own hair – in other words, because you can, doesn’t necessarily mean that it is something that you will want to undertake on your own. The process can be hard work. It will require your time, patience, diligence and perhaps some aptitude for understanding what the credit bureaus and collection agencies are required by law to do.
Instead, you may want to consider spending your tax refund on a professional, reputable credit restoration company to help you along the path to better credit. A well-qualified credit restoration company will provide you with important guidance as to how to address negative items that appear on your credit report, help you to maximize your credit utilization, teach you how to acquire and properly utilize a secured credit card, and help you with negotiating collection accounts.
Due Diligence is important if you choose to spend your refund on a credit restoration company. Research the company that you are considering and ask them how the work of restoring your credit gets done, and who does it. Look for a company that employs credit experts who are educated about credit and who will provide you with personal service. There are credit repair companies out there who do nothing more than sign you up for their services and then ship you off to a third-party service provider that does little more than repeatedly send out form letters to the credit bureaus.
Good luck getting those companies to pick up the phone and answer your questions about the status of your file after they sign you up. More than likely, they will have “to get back to you” after they send an email to their contractor thousands of miles away.
So, leave the home improvement projects and luxurious weekend getaways for next year. Give yourself the gift of a higher credit score. It’s a gift that keeps giving, throughout the year.