If you are one of the lucky ones that is getting an income tax
refund, do not cash the check when it comes. Instead, let's look
at a better use for the money, one that will pay a greater
dividend to you in the long term.
We are talking about your credit score. In a nutshell, there are
three credit reporting agencies in the US that keep close tabs
on your credit history, your outstanding debt, your
debt-to-income ratio and various other pieces of information.
These agencies do not share information about you, so not one of
them has a totally 100% accurate picture of your credit history,
but that is what almost all lenders use to calculate your credit
score.
Your credit score is used to determine your credit worthiness in
the eyes of a potential lender. The average credit score in the
US is around 660, and this is a number that can range from about
350 to around 850. The timeliness that you have historically
shown in making your credit card payments, loan payments, and
mortgage payments are reflected here. You get points subtracted
for being near or over your credit limit on any accounts, and
more points subtracted if you make late payments.
While there is much more that goes into calculating your credit
score, you can use your tax refund to actually increase your
credit score. Say you have a couple of credit cards that are
pretty much maxed out, perhaps even over their limit. Pay off
those cards or at least pay down the majority of the balance,
which will in turn raise your credit score because your debt to
income ratio will look that much better.
Many people just splurge on something when they get their income
tax refund, maybe getting a new car or that huge new plasma TV
or a kitchen remodel job done. But what good does that do you?
Really, nothing in the long run, and paying down some of your
credit cards or loans has a much greater long lasting effect,
which is all to your benefit. You need to put that money where
it will do the most good for you in the long term, not for a
very short term benefit.
The average person in the US has 8 to 10 credit cards, although
credit counseling will advise having no more than 2 or 3. If you
only have 2 or 3 credit cards, then the temptation to max them
out will be less, simply because your credit limits are not
going to be that high to allow you to get into real serious
trouble financially.
The credit bureau gives the most points towards your credit
score for accounts that are paid on time, have never gone over
their credit limit, and have an outstanding balance of between
20-25% of the credit limit. This gives you a comfortable margin
for charging things that you need, but it does not make you
appear to be living on the edge, as it would if you had credit
card account that were consistently at 80% or more of your
credit limit.
Put your income tax refund to work for you. The time and effort
that you put into raising your credit score will pay off in
spades for you in the future.
About the author:
For more insights and additional information about how to
Score as well as getting free copies of your credit reports,
please visit our web site at http://www.credit-help-center.com
