How to Use Your Tax Refund to Build Your Credit
When most people think about ideas for what to do with their tax refund, they usually focus on paying off debt, saving money or taking a special vacation … but what if you could use your tax refund to build your credit history?
In this guide, we’ll walk you through how you can use your tax refund to help build or rebuild credit:
How can you get the most out of your tax refund?
If you have a limited credit history or desire to regroup after bankruptcy or another financial setback, you might want to consider using your one-time windfall from your tax refund as a starting point to help build or rebuild your credit history by getting a secured credit card.
Whether you have a limited credit history or less-than-perfect credit, getting a secured credit card is a good option to help with responsible use. It’s one of the few options that can get you back on track for being approved for a standard credit card.
Your secured credit card is a real credit card, not a debit card or prepaid card. Using your secured credit card can help build a credit history with the 3 major credit bureaus. Prepaid and debit cards generally can’t do that. This is how a secured credit card offers you an opportunity to get more than just money from your tax refund.
How does a secured credit card work?
Unlike a typical credit card, which assigns you a credit limit based on your credit history and perceived ability to repay the amount you borrow, with a secured credit card, you’re required to provide a security deposit up front before you can borrow any money. Your credit limit will usually equal the amount of your security deposit, up to the amount that can be approved.
For example, the Discover it® Secured Credit Card lets you open an account with a refundable security deposit of as little as $200 or as much as $2,500. Your credit limit on the card is equal to your security deposit, up to the amount they can approve – so, upon approval, if you’ve put down a security deposit of $1,000, you can borrow up to $1,000 with your new secured credit card. It even offers cash back rewards. On top of all that, Discover will automatically match all the cash back you earn at the end of your first year as a new cardmember 2.
Is a secured credit card the same as a prepaid card?
No, it isn’t. With a prepaid card, your usage may not be reported to the credit bureaus; having paid in advance, you’re spending your own money. With a secured credit card, you are engaging in a credit relationship and establishing a habit of responsible credit use.
Also, to obtain a secured credit card, you must go through a formal application process providing personal and financial information, including:
- Your Social Security number (SSN)
- Your bank account checking and routing number
- Contact information
- Refundable security deposit (which will equal your credit line)
- U.S. mailing address
On the other hand, prepaid cards function similar to gift cards and generally do not report to the 3 major credit bureaus. These do not require any formal registration process to a specific name or account.
Why are secured credit cards unique?
Secured credit cards act and operate in a very similar manner to a standard credit card. Except for the initial step of paying your refundable security deposit, a secured card is a real credit card: You will be approved for a credit limit (equal to the amount of your security deposit), and you have to repay the amount you borrow, as well as pay interest, fees, and charges on any balances you carry on the card. If you pay your balance in full and close your secured credit card, you’ll get your security deposit back.
If you don’t have the initial security deposit required for opening a secured credit card, using your tax refund could provide a smart solution.
How does a secured credit card help build credit?
Having a secured credit card can help you build your credit history because your responsible credit use will be reported to the major credit bureaus. It allows these agencies to analyze creditworthiness factors, such as your:
- Payment history: Have you been making timely payments on your secured credit card balance?
- Amounts owed: Are you paying your monthly balance in full, or do you carry a balance over consecutive months?
- Length of credit history: How long have you been responsibly using your secured credit card?
This way, lenders can assess if you are demonstrating responsible use of your new secured credit card.
Can you upgrade from a secured to a standard credit card?
Pay your bill in full each month by the due date to avoid interest on new purchases while building your credit history. After 8 months, as your usage is monitored and you show responsible use of credit across all lenders, Discover, for example, will review your account to see if you qualify to “graduate” out of your secured credit card.
Why use a tax refund to get a secured credit card?
If you are building credit for the first time (or have less-than-perfect credit), using your tax refund could present a good opportunity to do so. According to IRS data, in 2016, the average tax refund was $2,795. If you get a $2,000 tax refund – even if you use part of it to pay down other debts or to establish emergency savings – you could still put $1,000 or so toward the refundable security deposit for a secured credit card. Most people don’t receive a sudden windfall of $2,000 very often – so you may want to take advantage of it.
By establishing a secured credit card, you are giving yourself a chance to build or rebuild your credit. Of course, there are many major benefits to having a higher credit score.
How can you put your tax refund to work for you?
There are many ways to take advantage of your tax refund. A responsible decision may be to open a secured credit card if you’re looking to build or even rebuild your credit.
Beyond this, there are other tactics you should know to make the most of your tax refund. After all, the more you get out of your tax refund, the larger the credit line you may be able to open with a Discover it® Secured Credit Card.
Just remember: There are no “wrong answers” for what to do with a tax refund, but perhaps one of the most beneficial is to use this money to help build your credit by getting a secured credit card.
1 Builds credit with responsible use: Discover reports your credit history to the 3 major credit bureaus, so it can help build your credit if used responsibly. Late payments, delinquencies, or other derogatory activity with your other credit card accounts and loans may impact your ability to build credit.
2 Cashback Match: Only from Discover, as of December 2017. No purchase minimums. After the first 12 consecutive billing periods that your new account is open, we will match all of the cash back rewards you’ve earned and apply them to your account in the following one or two billing periods. If your account is closed or no longer in the cash back reward program at the time we calculate your potential award, your cash back will not be matched. You’ve earned cash back rewards when they have posted to your account by the end of the 12th consecutive billing period. This promotional offer may not be offered in the future. This exclusive offer is available only to new cardmembers.