Credit usage is commonplace today. If you take a look around you, it is likely that you will find people servicing some or the other kind of credit. However, most of them may not know the importance of having a good credit score of 750 and above (out of 900). Not just that, you must make a continual attempt to improve credit score. Maintaining good credit score is no rocket science. Just like a good diet and regular exercise can keep you in good physical health, maintaining good credit habits and carrying out a CIBIL score check at regular intervals is adequate.
However sometimes your credit usage may have gotten out of hand and you find yourself wishing that you had some extra cash in hand to save yourself from a debt trap. Well, here we have to tell you about one such magic potion that can help you improve credit score. You know it better by the name of your tax refund! Here is how your tax refund can help you improve credit score.
Pay off outstanding balances
Seeing that extra cash being directed into your account by way of a tax refund is indeed a joyous feeling of having done something right. But before you decide to splurge around with it, take a close look at your credit card outstanding balances. If you find yourself stuck in a vicious cycle where you do not have enough money to make full repayments in each billing cycle, there is something wrong happening that needs to be set right! One easy solution is using the money from your tax refund to pay off that outstanding balance on your credit card.
Pay off high interest debt first
If you are using multiple credit cards, you ought to know that that credit card interest is the highest rate of interest you pay as compared to any line of credit. Check the annual percentage rate of your credit cards and find out which card charges you the highest. Use your tax refund to pay off such high cost debt to improve your credit score. Do not however close your credit card accounts as it will bring down the age of your credit. Just ensure that you are using all your credit cards in a way you can pay outstanding balances on full each month.
Consider a secured credit card
If you are looking at building your credit score for the very first time, as you have no previous credit usage, consider opening an FD with your tax refund money and then take a secured credit card against it. This is a fool proof method of building or improving credit score, as your credit limit is fixed at a certain percentage of your fixed deposit amount. However, do not take this as a sign to go berserk with your credit card spend as it will work against you. You can only build your credit score with a secured credit card if you have regular repayment habits and like any other credit card, make it a rule to pay outstanding amount in full in each billing cycle.
Repay other unsecured loans
if you have all the above checked and have no such problem with your credit card payments or have precarious credit card debt, hold on before you spend all your tax refund on an expensive gadget or simply squander it away. If you have other unsecured line of credit such as a personal loan, repay it first and close your loan account. Reducing the number of unsecured lines of credit and maintaining a good mix of secured and unsecured credit helps you improve your credit.
Beef up your emergency fund
Finally, if you have all unsecured credit under control, it is time to take a look at your emergency fund. Life is uncertain and may throw a spanner at you at any time in the form of a financial emergency. An emergency or contingency fund is thus a must have especially if you are servicing debt. This fund should be able to meet all your debt repayment commitments as well as take care of your regular expenses for a period of three to six months. If you are still falling short on this target, use your tax refund to beef up this fund or build one if you haven’t done so yet with your tax refund. Although, this does not have a direct impact on your credit score, having such a fund will give you the mental peace from knowledge of the fact that you will be able to service your debt, even if an emergency stares you at the face.
Lastly but not the least do not undermine the importance of carrying out a CIBIL score check after you have taken specific measures to improve credit score. Carrying out periodic checks on your CIBIL score will ensure that your CIBIL report remains error free.
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