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 or saving money or taking a special vacation…but what if you could use your tax refund to build your credit history?

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If you have limited credit history or need to regroup after a bankruptcy or other financial setback, you might want to consider using your one-time windfall from your tax refund as a starting point to help build your credit history by getting a secured credit card.

Whether you have limited credit history or less-than-perfect credit, getting a secured credit card is a good option to help with responsible use. Your secured credit card is a real credit card, not a debit card or prepaid card. Using your secured credit card will build a credit history with the three major credit bureaus.

How does a secured credit card work?

Unlike a typical credit card, or unsecured credit card, which assigns you a credit limit based on your credit history and your perceived ability to repay the amount you borrow, with a secured credit card your credit limit will usually equal the amount of your security deposit, up to the amount that can be approved — and you’re required to provide a security deposit up front before you can borrow any money.

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 the amount of your security deposit, up to the amount we can approve — so, upon approval, if you 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.

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.

Except for the initial step of paying your refundable security deposit, a secured credit 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, and you also have to pay interest, fees and charges on any balance that 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.

How does a secured credit card help build credit?

Having a secured credit card can help you build credit history because your responsible credit use will be reported to the credit bureaus. Pay your bill in full each month by the due date to avoid interest on purchases while building your credit history. After 7 months, as your usage is monitored and you show responsible use of credit across all your lenders, Discover, for example, will review your account to see if you qualify to “graduate” out of your secured credit card.

Many people who have less-than-perfect credit might not qualify for a standard unsecured credit card, or might not want to apply for one. A secured credit card gives you another option to get access to credit and build up your credit history in order to have a stronger financial foundation for the future.

Why use a tax refund to get a secured credit card?

If you have less-than-perfect credit and want to get serious about rebuilding your credit history, using your tax refund presents a good opportunity to do it. According to IRS data, in 2015, the average tax refund was $3,120. If you get a $3,000 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 $3,000 very often — so you should take advantage of it.

By establishing a secured credit card, you are giving yourself a chance to rebuild your credit.

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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.

Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.

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