How to Use Your Tax Refund to Build Better Credit

You can use your tax refund to improve your credit by paying down high credit card balances, catching up on past-due accounts, and building an emergency fund. Lowering your credit utilization and staying current on payments can help strengthen your credit profile over time.

Your tax refund just hit your account, and if you’re like most people, you’ve probably already got a mental list of things you’d love to spend it on. But here’s the thing: when you’re working on repairing your credit, your refund isn’t just money, it’s an opportunity to make real progress.

So before you spend it, let’s talk about how to use your refund in a way that helps your credit.

Why Your Tax Refund Matters for Credit Repair

Think of your tax refund as a financial boost. It’s a lump sum that can help you make moves you might not be able to afford month-to-month.

The average tax refund is around $3,000. That’s significant money that could help you knock out past-due balances, reduce high credit card utilization, or build a financial cushion that prevents future credit issues.

Let’s explore how to make it work for you.

Pay Down High-Utilization Credit Cards (Every Dollar Counts)

Your credit utilization ratio, or how much of your available credit you’re actually using, accounts for about 30% of your FICO® credit score. High utilization can drag your score down, even if you’re making all your payments on time.

Here’s the good news: you don’t have to pay off your cards completely to see an impact. Simply reducing your balances can help.

What to do:

• Focus on cards that are maxed out or near their limits first
• If you have multiple high-balance cards, spreading your refund across them to bring each below 30% utilization can be more effective than paying off one card completely
• Make the payment before your statement closing date so it gets reported to the credit bureaus

Catch Up on Past-Due Accounts

Payment history is the single biggest factor in your credit score, making up about 35% of your FICO® score. If you have any accounts that are past due, your tax refund gives you a chance to get current.

Start with:

1. Accounts that are 30-60 days past due (before they get worse)
2. Accounts approaching 90 days past due (these hurt your score more significantly)
3. Collection accounts, especially recent ones

Important note: Getting an account current stops it from falling further behind, but the late payment history will still appear on your report. Getting the account back on track now prevents additional damage to your credit.

Start or Replenish Your Emergency Fund

This might not sound exciting, but it’s very important. Unexpected expenses are one of the main ways people end up with damaged credit.  An emergency fund can keep you from missing payments or maxing out credit cards when life happens.

Get started:

• Even $500-$1,000 can make a difference when emergencies strike
• Keep this money in a separate savings account you don’t touch for everyday expenses
• Think of it as insurance against future credit damage

You don’t need six months of savings right away. The goal is to have enough to avoid future late payments when life throws you a curveball.

3 Common Tax Refund Mistakes to Avoid

Sometimes people get their refund and accidentally make moves that hurt their credit progress. Here are the pitfalls to watch out for.

Mistake #1: Making a big purchase that spikes your utilization

You paid down your credit card, which is great. But then you immediately charge a $2,500 purchase because “you have the room now.” This defeats the purpose. Your utilization shoots right back up, and you’re back where you started or worse if you can’t pay off the new balance quickly.

Better approach: If you need to make a large purchase, use your debit card or cash from your refund instead of credit.

Mistake #2: Closing paid-off accounts

Closing credit card accounts can actually hurt your credit score in two ways: it reduces your total available credit (increasing your utilization ratio on remaining cards) and it can impact the average age of your accounts.

Better approach: Keep the account open, use it occasionally for small purchases you can pay off immediately, and put the card in a drawer. The available credit helps your score.

Mistake #3: Paying only creditors and ignoring your own financial safety

Yes, paying down debt is important. But if you drain your entire refund to pay creditors and then can’t afford next month’s bills, you’re setting yourself up to fall behind again.

Better approach: Split your refund. Put some toward debt, some toward your emergency fund, and some toward upcoming expenses you know are coming (like car registration or insurance).

The Bottom Line

Your tax refund is a tool. If you use it wisely, it can help you repair your credit faster. Whether you put it all toward debt, split it between multiple goals, or use part of it to build financial stability, the important thing is that you’re making conscious choices that support your credit repair journey.

Ready to take the next step in your credit repair journey? If you haven’t already, request your free credit assessment from Lexington Law. We’ll review your credit report summary and help you understand which items might be eligible for challenge. The healthiest financial future starts with accurate credit reporting and that’s something we can help you fight for.

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