If you're getting a tax refund this year, you've got three major options when it comes to using the money: You can save it. You can invest it. Or you can splurge. But break things down a little further, and that check (back) from Uncle Sam can help you build credit, too. For serious.
Here are six ways your tax refund could help you build — or even establish — your credit scores.
1. Pay Down Credit Card Balances
Second rule of credit scores: Keep your debt level below at least 30% (and ideally 10%) of your total available credit. Anything beyond that is bad for your credit utilization ratio. If you're over that limit or, worse yet, bumping up against your limits, putting your tax refund toward your credit card balances can help improve your credit score. Better yet …
2. Pay Off High-Interest Credit Card Debt
Because those balances are going to spike pretty fast. Plus, you'll be saving money in the long run. Good rule of thumb when it comes to dealing with multiple credit card balances: Make all your minimums, but put more money toward either the smallest (because motivation) or the one with the highest annual percentage rate (because, like we said, it'll cost you less). You can see how your credit card use is affecting your credit by viewing two of your scores, updated every 14 days, on Credit.com.
3. Get a Secured Credit Card …
If you've got thin-to-no credit, consider using your tax refund to open a secured credit card. Secured credit cards are easier to get than other types of credit cards because they require the cardholder put down a deposit (usually $200 to $300) that serves as the credit line. (Or vice versa. That's a little bit of a chicken-or-the-egg thing.) In any event, if you're close to cash-strapped, you can use your tax refund to open the card. That line of credit will help you establish a payment history, the most important factor among credit scores — so long as you pay your charges off by their due date, of course.
4 … Or a Credit-Builder Loan
Credit-builder loans, available at your local bank or credit union, are essentially the installment loan version of a secured credit card. You "borrow" money (that's where you tax refund comes in), which gets put in a savings account, then you make a series of monthly payments and get access to the money once the "loan" is paid in full. Credit-builder loans usually involve paying some interest on the money you're borrowing/depositing, but they basically provide people who otherwise don't have credit with the opportunity to build some.