Why Should I Build Credit with My Tax Refund?

a young person does their taxes online

Tax season probably isn’t the highlight of your year, but the prospect of a tax refund can make it all worthwhile. While there are countless ways to use a tax refund, we recommend choosing an option that positively impacts your financial well-being. That’s where credit building with a secured credit card comes into play. In 2023, the Internal Revenue Service (IRS) disclosed that the average  tax refund for the 2022 tax year was $2,753, which is a significant amount for improving your financial health and credit score. Keep reading to learn why you should put your tax refund into a secured credit card.

When is Tax Season?

Tax season typically runs from January 29 to April 15, marking the period when the IRS officially accepts and processes tax returns. If April 15 falls on a weekend, the deadline is extended to the following Monday. Late submissions after the deadline may incur penalty fees and interest charges. However, filing a tax extension form grants a delay until October 15, providing an additional six months beyond the initial tax day to file and return.

Why Should I Use My Tax Refund for a Secured Credit Card?

A good credit score opens the door to practical financial opportunities, making it easier to secure jobs, rent apartments, obtain loans, and more. Depositing your tax refund in a secured credit card is the best way to build your credit score. Here are the benefits:

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Start Your Credit History

Credit history is the period of time that your accounts have been active, playing a role in determining your credit score. However, beginning the journey to start credit history can feel like solving a mystery, especially since you need credit to establish credit. This is why people without an established credit history or with less-than-ideal credit often face challenges getting a credit card and improving their credit score. But everyone needs to start somewhere. Secured credit cards provide an excellent solution in these situations because they offer a straightforward way to kickstart your credit history, even if you have little-to-no credit.

Build a Strong Payment History

While credit history is the time your accounts have been active, payment history is the record of your past payments and their timeliness. Payment history is the most significant factor influencing your credit score, making up 35% of the total. Maintaining consistent, on-time payments with your secured credit card is a key driver in establishing a positive payment history, which communicates financial responsibility to potential lenders. Utilizing your tax refund to make payments is a smart approach to keep your payment history on the right track, setting the stage for a positive credit score. You can use a Credit Card Payoff Calculator to help with the process.

Add to Your Credit Mix

Lenders and creditors value seeing a variety of credit types in your history because it indicates your ability to manage various credit accounts. This mix might include credit cards, student loans, auto loans, and mortgages. When you use your tax refund to open a secured credit card, you're not just adding a new credit line—you’re diversifying your credit profile. This not only positively influences your credit score but also shows lenders that you can handle different types of credit responsibly, making you a more appealing borrower.

Higher Credit Limit and Lower Credit Utilization Ratio

Adding funds to your secured credit card increases your available credit limit and decreases your credit utilization ratio, which is a good thing. This ratio plays a big role in credit scoring, and it’s calculated as (Credit Card Balance / Credit Limit) x 100.

For instance, if you have a $600 balance on a secured card with a $1,000 limit, your credit utilization stands at 60%, exceeding the recommended 30%. However, by depositing an additional $1,000 from your tax refund and increasing the credit limit to $2,000, your credit utilization drops to 30% ($600 / $2,000). Using your tax refund to manage your credit limit can be a smart way to boost your credit score, provided you steer clear of significant increases in spending.

Financial Safety Net

Utilizing your tax refund for a secured credit card is a great move in building credit because it has an automatic safety net in place. Specifically, secured credit cards are supported by a cash deposit, serving as collateral for the card issuer. If you ever miss a payment, don't worry. The issuer can use your cash deposit to cover it, making things safer and more secure for you. It's like having an extra layer of protection and peace of mind!

Opportunity to Reclaim Your Deposit

As mentioned, a secured credit card requires an initial cash deposit, which is refunded when you close the account (as long as you have consistently paid your balance on time and in full each month). Closing a credit card may have some negative impact on your credit history, but the option to retrieve your deposit provides flexibility, especially if you find yourself in need of funds.

Secured Credit Cards from Academy Bank

You can and should use your tax refund for something you enjoy, but why not consider making those purchases with a secured credit card? Academy Bank’s Credit Builder Secured Visa® Credit Card offers a great solution to build credit while spending. You can tailor your credit limit to your needs, ranging from $300 to $3,000. This flexibility allows you to deposit your entire tax refund or just a portion, putting you in control of managing your finances your way. With automatic reporting to major credit bureaus (Equifax, Experian, and TransUnion), this card helps you build a credit history, providing well-deserved recognition for your positive financial behavior.

The cherry on top? Building strong credit with this card opens doors to upgrades for unsecured credit cards down the line. That’s right—additional perks, bonuses, and financial opportunities could be in your future.

There's no application fee, so why not sign up for Credit Builder today? It’s time to make your tax refund work for you!

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Subject to credit approval. Transaction and Penalty fees apply.  Credit Builder Savings account required. $5.00 quarterly fee charged to the Credit Builder Savings account if not enrolled in eStatements. Improved credit score is not guaranteed. Credit score is determined by credit reporting agencies based on multiple factors, but satisfactory performance on a credit card product can improve your credit score. Default on a credit card, including missed or late payments can damage your credit score. Once added, funds cannot be withdrawn from the Credit Builder Savings account and the Credit Builder credit card without closing the savings account and the credit card.