Tax season can be daunting but for the select few that get a tax refund, this can be a rewarding prize. Once you get your check from the government, it may be tempting to spend it on something lavish. But it may be a better idea to use your tax refund to improve your credit. Everyone's finances are different, but knowing that you have paid off some debt can be a relaxing feeling and using a tax refund can improve your credit score.
Paying off high interest cards
If you decide to pay off some credit cards with your tax refund, begin by focusing on the cards that carry the highest interest rates. A card with a high interest rate will charge a bigger fee thus sinking you into more debt and possibly maxing out your card. As 30 percent of your credit score is based on how much you owe on a card, paying off any balances will help improve it.
Save for the future
It is always good to have an emergency fund ready to cover unexpected circumstances. The future can be unpredictable, and running into a financial obstacle can do real damage to your bank account. Once you receive your tax refund, consider using it to start an emergency fund, which may prevent unexpected emergencies from sending you into debt.
Along with saving your tax refund for unexpected expenses, you may want to consider beginning to prepare for retirement. Many Americans are starting to work into their later years because they could not save up for retirement because of the market. Using your extra cash to save up for your future can be beneficial for both you and your family. It is becoming more common for people to use their tax refunds for retirement. A survey conducted by Charles Schwab found that 31 percent of Americans ages 50 and older use their refund start a retirement fund. Even if you are not in this age group, it never hurts to start preparing for the future.
Once your tax refund arrives, it might be enticing to spend it on a generous gift for yourself, but your best bet is using it to improve your credit. Paying off debt or storing the extra cash in your savings will benefit your bank account and improve your credit in the process.