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Use Your Tax Refund to Improve Your Credit Score

Posted By: Alan Donald In: Personal Finance
Date: Sat, May 9th 2009 9:14 am

The Path of Money

I recently read an article in the Post & Courier that had some interesting suggestions about how to use your tax refund this year to improve your credit score. These are the highlights:

  1. Set aside only a small percentage (i.e. 10%) of the refund as "spending" money.
  2. Set up an emergency fund - just in case you or your spouse are laid off. They recommend having 6 months to 12 months household expenses in this fund. You can put up to $5,000 a year ($6,000 is you are 50 or older) into a Roth IRA and invest it in a CD or money market mutual fund so that it is not vulnerable to stock market variations. And you can use this money for college, retirement or emergency without paying penalties, since Roth IRAs are set up using after-tax dollars.
  3. Pay off some high interest credit cards to reduce your debt. And maybe transfer the balance to a lower interest card.
  4. Secure your credit cards. Banks are reviewing all credit card use and if you've got unused credit cards in your drawer, they may be cancelled for lack of use. Take them out, use them for a purchase you would do anyway, and pay it off in full at the end of the month. You may need all the credit you can get if you lose your job.
  5. Avoid using more than 30% of your credit "capacity" to keep your credit score high.

If you are thinking about buying a home, remember that the higher your credit score, the lower the interest rate lenders will offer you...