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
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!