Using Your Tax Refund to Pay Down Debt? Think about Your Credit Report.

Using Your Tax Refund to Pay Down Debt? Think about Your Credit Report.

Thinking of using your tax refund to pay down some debt? Great idea. Just be cautious; paying down debt is a smart strategy, but closing lines of credit could hurt, not help your credit report and score.

When lending institutions are deciding whether or not you are creditworthy, they’ll look at your credit score, which is made up of several different factors. Keep in mind that credit scores can vary across credit reporting agencies because how they receive and interpret information from lending institutions may differ slightly. To better understand your score and what it means for your likelihood of receiving credit, here are the main factors that impact your score: 

·         On-time payments: On-time payments are weighted heavily in your credit score. Even one late payment can impact your overall score, so be sure to pay bills on time to keep your score looking good and show lenders that you are a reliable consumer.
·         Age of credit: The ages of your student loans, mortgages, credit cards and other lines of credit are looked at. Lenders like to see long credit histories, as this gives them a better picture of your long-term creditworthiness. This is an important factor, so closing out old credit accounts shortens your age of credit and could reduce the overall credit available to you (and why it is suggested that you do not close old accounts).   
·         Open Credit Card Utilization Rate: This is the rate of credit available to you compared to the amount you are currently using. Those with lower utilization rates (those who have the credit available, but aren’t currently using it) are more likely to have higher credit scores. So, avoid carrying high balances on your credit cards. Paying off as much of your monthly balance as possible could also benefit your score.
·         Hard Credit Inquires: Applications for credit cards, loans (personal, student, auto, etc.) and mortgages result in hard inquires, which signals to lenders that you are in need of credit.  Multiple hard inquiries could lower your score, so avoid this problem by only applying for credit when necessary and applying for one line of credit at a time.
·         Derogatory Marks: Liens, foreclosures, bankruptcies and accounts in collection can stay on your report for seven to 10 years. These signal to lenders that you have had problems managing your credit in the past, and may mean that you may not be approved for credit in the future.  
·         Mix of Accounts: Contrary to what you may think, those with varied accounts usually have higher scores (a mix of mortgages, credit cards, student loans, etc.). But, don’t open accounts just to increase the number of accounts you have. Instead, open new accounts as you can manage, make your payments on time and slowly and steadily build up your credit, keeping in mind that the above factors do not work independently of one another, but together, as an overall picture of your creditworthiness.

Check your credit report regularly – from each of the three credit bureaus (Experian, TransUnion and Equifax) to make sure that you understand how these factors can impact your scores. And don’t worry -- checking your own report does not negatively impact your scores.