How Tax Refunds Can Impact Your Credit Score
Written by
Sarah Li Cain
Edited by
Amen Oyiboke
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Getting a tax refund can be as exciting as it sounds. But can getting this money affect your credit score?
The short answer is no.
“A tax refund does not directly impact your credit score because the IRS doesn’t interact with or report information to credit bureaus like Equifax, Experian, and TransUnion,” said Andrew Wang, managing partner at Runnymede Capital Management. “The IRS isn’t a lender, and tax refunds aren’t a form of credit or debt repayment, so they don’t get factored into your credit file.”
However, how you use your tax refund can have a positive effect on your financial life, including your credit score.
There are different ways you can use your tax refunds, such as paying down high-interest debt. For example, if you carry a balance on several credit cards, you can consider paying these off with your tax refund. Doing so could lower your credit utilization, a major factor in calculating your credit score. Or, you could use the funds to pay down other loans, which can make you look like a lower-risk borrower to lenders.
Wang suggests that if you’re starting or rebuilding your credit, use your tax refund to get a secured credit card or credit builder loan. With a secured credit card, you put down a refundable cash deposit that acts as your credit line. A credit builder loan is where you borrow funds, but instead of getting the money right away, the lender deposits it into a separate savings account until you pay the loan off.
“Both of these methods require upfront cash but can create long-term benefits and establish a positive payment history if used responsibly,” Wang said.
Stephanie McCullough, founder of Sofia Financial, suggests looking at your current financial situation to see where your tax refund may be best used. Depending on how much your refund is, you can even use it in other areas of your financial life.
“Make a checklist to see where your money can have a huge effect, like paying off high-interest debt, or even putting money towards your emergency fund,” she said. “Even if it’s for big expenses like dental work or hiring a plumber is helpful.”
Having an emergency fund is helpful because you can tap into it for unexpected expenses and prevent you from taking on additional debt. That way, you don’t risk having higher debt payments, stretching your budget too thin. Having less debt means fewer chances of you struggling to make payments and risk being late paying back lenders which could negatively impact your score.
If you’re already behind on payments, using your tax refund to catch up can help prevent any more damage to your credit score.
No matter how you use your tax refund, it’s an opportunity to get you on the right track to better financial health.
“It won’t magically raise your credit score overnight but using a tax refund strategically, whether to reduce debt, build credit, or improve cash flow, can set you up for long-term financial success,” Wang said.
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