Ah, tax season. That taxing time of year (pun intended) when taxpayers eagerly prepare and file their tax returns for the previous year. Although your tax information generally isn’t reported to the credit bureaus, there is a way it can show up in your credit history.
How Taxes Can Affect Your Credit History
Tax season generally falls between January 1 and April 15 of each year. If you owe money to the Internal Revenue Service (IRS) and miss the April 15 deadline, it could result in a tax lien, which can negatively impact your credit history.
According to IRS.gov, a federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The IRS files a public document called a Notice of Federal Tax Lien that alerts creditors that the government has a legal right to your property. If the government has filed a tax lien against you, it will show up on your credit report. If you pay your tax debt in full, the lien will be released within 30 days after you’ve paid.
Ways Your Tax Refund Can Help Improve Your Credit
A tax lien is the only tax-related information that can show up on your credit report and directly impact your credit history. However, there are ways you can use your tax refund that may help improve your credit history.
According to the IRS, the average tax refund check for the 2019 tax season was $2,725. Using this money to get ahead on your financial responsibilities may help improve your credit over time. Here are some ways you can do that:
Pay down your debt.
Using your tax refund to reduce debt is a good way to improve your credit history. Paying more than the minimum balance due on credit cards and other high-interest lines of credit can also save you lots of money in interest charges over the long run.
Get ahead on bill payments.
It’s no secret that making on-time bill payments can help improve your credit. Using the extra funds from your tax refund to get ahead on bills can help you stay on track with your finances.
Contribute to your “rainy day” fund.
Unplanned expenses such as healthcare costs, home repairs or the need to purchase a car are often costly. Putting your tax refund toward an easily-accessible emergency fund can provide peace of mind and help you avoid incurring new debt when the unexpected happens.
Use it towards a down payment.
An Edmunds analysis of new and used car purchases in 2019 stated that the average car loan down payment was 11.7 percent. If you’re in the market to purchase a vehicle, using some of your tax refund towards a down payment on a new or used car may help may help lower your monthly payment.
While your tax refund doesn’t directly impact your credit, what you decide to do with it can. If you’re a credit-challenged car buyer who needs approval for vehicle financing, a car dealer enrolled in the Credit Acceptance program can help. Simply fill out the form on our website and start your credit approval today!