Ah, spring. As you watch the trees and flowers 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.
Here are five suggested ways to use the proceeds of your tax return to help boost your score:
1. 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. 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; here's a great site for this.
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.
2. Pay Down Your Credit Card Balances
Credit utilization is the second most important factor used in determining your credit score. Credit utilization means that you use credit, but you use it responsibly.
Ideally, the credit scoring formula looks for you to utilize 30 percent of a credit 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 percent. Do so, and you can expect to see an increase in your credit score in a very short time.
3. 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? Because they have never applied for nor utilized credit.
One of the best ways to become visible to the credit bureaus is to obtain 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.
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.
Shop around and be certain that you understand what you are getting and paying for with this type of card. It is crucially important that you use this card properly in order to effectively build your credit score.
4. Pay Off Collection Accounts
Would you like to stop getting calls from that collection agency that keeps calling about some 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 making a payment on them can retrigger statutes of limitations. Statutes of limitations are the time period, set by state law, during 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 period 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.
Also be aware, The Fair Credit Reporting Act only allows collection accounts to be reported for a certain period of time. This restriction is different than the statute of limitations. Depending upon the state law that applies, it may be longer or shorter than the statute of limitations.
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.
5. Hire a Qualified Professional Credit Restoration Company
You can attempt to fix damaged credit issues on your own. You can also attempt to 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.
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.
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.
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.