How to Build Your Credit with a Tax Refund

Tax Day is just around the corner! While tax season can feel like a chore, it often comes with a silver lining: a tax refund. During the 2024 tax season, Americans received an average refund of $3,138 for the previous tax year. That could go a long way. So instead of spending it quickly, why not use your refund to build credit and strengthen your finances? Keep reading. This guide will cover how to build your credit using a tax refund.

1. Fund a Secured Credit Card with Your Refund

A secured credit card is a great tool for building credit—whether you are starting from scratch or working to improve your credit score. Since credit history is built over time through consistent account activity, opening a secured card can help establish or strengthen that history. Secured credit cards require a cash deposit, which determines your credit limit. That’s where your tax refund comes in—it’s a great way to cover the deposit without dipping into your savings.

Once your card is set up, responsible use is key: keep your spending in check and make on-time payments each month. Over time, this habit can strengthen your credit score and may even help you qualify for an unsecured card (with perks) in the future.

2. Pay Future Credit Card Bills

Your payment history accounts for 35% of your credit score, making it the most important factor. Missing a payment can have a big impact on your credit score, so it’s important to plan ahead and make smart financial choices to prevent that from happening.

A great solution is setting aside a portion of your refund to cover your credit card payments for the next few months. This ensures that you will always pay on time, even if money gets tight. By consistently paying the balance by your due date, you will maintain a strong credit score.

HELPFUL TIP: Automate your payments so you never forget a due date.

3. Lower Your Credit Utilization Ratio with Tax Refund

Sometimes called the debt-to-credit ratio, your credit utilization ratio is the percentage of your available credit that you are currently using. The key number to remember here is 30. Keep your utilization ratio at 30% or below to show lenders that you are managing credit responsibly. Plus, your utilization ratio makes up roughly 30% of your credit score, so you should focus on keeping it low for your credit standing.

Example: Let’s say you already have a secured credit card with a $500 limit. You can use part of your tax refund to increase your deposit to $1,000, which doubles your credit limit. If you keep your balance low, your credit utilization rate will decrease, which positively impacts your credit score.

4. Pay Down Existing Debts

If you have unpaid debts, putting your tax refund toward paying them can help you build credit. It’s smart to focus on repaying high-interest debts first—like credit cards—to save money on interest. This strategy is known as the “avalanche method,” and it speeds up debt reduction while also improving your financial health.

Example: If your high-interest credit card debt is $1,500 and you use $1,000 from your tax refund to repay that debt, you significantly lower your balance. This reduces the interest you owe and helps you save money in the long run. And as a bonus, this improves your credit utilization ratio.

5. Plan for Future Tax Refunds

This year’s tax refund won’t be the only one you ever receive, so plan ahead to make the most of future refunds too. Consider adjusting your withholdings to better fit your financial goals. A bigger paycheck throughout the year might allow you to save steadily, but a larger refund can give you a lump sum to make impactful moves.

Plan ahead for how you will use your future refunds—whether to pay down debt, grow your savings, or unlock better financial opportunities like premium credit cards and mortgage loans.

Credit-Building at Armed Forces Bank

Your tax refund is more than just extra cash—it’s a mission-ready asset for building or rebuilding your credit. Whether you put your refund toward paying debt, creating a financial safety net, or opening a secured credit card, you are paving the way for greater opportunities ahead.

Ready to get started? Armed Forces Bank is here to support you! Our Credit Builder Secured Visa® Credit Card is designed with you in mind, offering a simple and effective way to build your credit while also giving you flexibility. Here’s why it’s one of the best credit cards for building credit:

• No Application Fees, Annual Fees, or Over-Limit Fees.
• Automatically Reports to the Major Credit Bureaus to help build your credit history.
• Flexible Credit Limits based on your deposit (ranging between $300 and $3,000).
• Potential for Upgrading to Unsecured Cards when you show a history of on-time payments.

Plus, Armed Forces Bank provides useful financial solutions, including advice on best credit practices and online banking tools for managing your finances. Get started today!

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