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How to use your tax refund to improve your credit score

Expecting a refund this year? Don't just blow it – here's how to make it work for you.

Receiving a tax refund is always welcome, but when those hundreds or thousands of dollars hit your bank account it can be tempting to splurge on something you don't need. If you are interested in putting your tax refund towards something that will help your finances and start the new financial year off right, this guide will show you how to use it to improve your credit score.

Step 1: Check your credit score

You won't know how much your credit score has improved after this process if you don't know what it is now. You can check your Equifax credit score for free with finder.com.au. Improving your credit score is a long-term play, so make sure to check back every six months to see how you're tracking. To help you, we'll send you an email reminder to do just that.

Check your credit score

Step 2: See how much tax you might get back

Use the calculator below to get an idea of how much tax you can expect to get back. Remember that this calculator will only tell you how much tax you'll need to pay based on the income you've stated. The number does not take into account the Medicare levy, Medicare levy surcharge, HECS, or Student Financial Supplement Scheme (SFSS) liabilities or any deductions you might be entitled to, so be sure to keep this in mind.

Step 3: List your debts

While this is a guide to improving your credit score, the key to it lies in eliminating debt and improving your overall wealth position. So, the first step is to make a list of all the debts you have. You'll need to note the following:

  • Debt type. Is it credit card debt, personal loan debt, debt from an overdraft or something else? Note this down.
  • Amount. How much do you owe?

Step 4: Pay them down to improve your credit score

If the aim is to pay down your debt the fastest, you would not use this method. However, credit scores don't necessarily work like that. When looking at how to pay down your debt to benefit your credit score, consider whether your tax refund will pay off any of your debts entirely.Your credit file only lists the credit limit of your account, not your outstanding balance. So unless you can pay off your total debt, it will not change your credit score. Here is what you should do given these three different situations:

Your tax refund is not sufficient to pay off any one of your debts entirelyYour tax refund is sufficient to pay off one of your debtsYour tax refund is sufficient to pay off your debts and then some.
You need to look at the best way to optimise your tax refund to pay off your debt. You could do one of the following with your tax refund:

  • Put it towards the debt with the highest interest rate
  • Put it towards the debt with the lowest balance to bring it close to being paid off
  • Put it towards a number of your debts, focusing on the accounts where you are being charged the highest interest
  • Put it into your savings account and then make additional payments throughout your loan term. This is a good strategy to consider if you have restrictions on additional payments
Consider paying off one of your debts completely. Doing this will have the following benefits:

  • Get yourself out of debt (for this account)
  • Improve your credit score
  • If this is a personal or car loan and you're paying it off early, this will likely have a better effect on your credit score (remember to check early repayment penalties)
Definitely consider paying off your debts in their entirety. Then, go to step five.

Step 5: Invest in yourself

Paying down debts has a direct effect on your credit score. And while increasing your savings, your investments or your income is important, it will have no effect on your credit score. What it will do is put you in a position where you will be less likely to need to take out a loan or rely on credit in the future.

So, if you have some of your tax refund left over from paying down debts or had no debts to pay down, you may want to consider some of the following investment strategies:

  • High-interest savings account. This is an obvious one and probably one of the easiest. Deposit your tax refund directly into an account and start earning interest. The main benefit of one of these accounts is that you can draw on the funds whenever you need to, and if you're feeling particularly savvy, you can continually take advantage of bonus savings offers.
  • Robo-advice. If you're interested in investing but hesitant to get started, robo-advice could be something to consider. Robo-advice is automated investing based on your risk appetite and preferences. Acorns and Stockspot are two high-profile providers of this service. Check out our robo-advice comparison to see if any options might be right for you.
  • Fractional investing. There are plenty of lucrative investment options available that can be out-of-reach for people due to the minimum investment cost. Think property, for example. Fractional investing lowers the entry barrier to these investment options by allowing you to buy portions of what is the standard investment size. For example, BrickX lets you buy shares ("bricks") of a property and share in the rental yield.
  • Exchange traded funds (ETFs). ETFs are a popular investment option for people in later life stages, but studies show younger people are also starting to see their benefits. ETFs own a range of assets and divide these into shares which can then be traded like stocks. Assets can include things such as shares, bonds and foreign currency.
  • Term deposits. These accounts work in a similar way to high-interest savings accounts except your funds are locked away for a set period of time. You have a guaranteed interest rate for that time but you cannot withdraw or deposit additional funds into the account.

So if you're due for a tax refund this year, consider putting it to work in improving your credit score.

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Picture: Shutterstock

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2 Responses

  1. Default Gravatar
    GreycatJuly 21, 2017

    Can anyone recommend a way to check my credit score using a NZ passport as ID? I have lived in Australia 7 years but I do not have a driver’s licence. Thanks.

    • Staff
      RenchJuly 21, 2017Staff

      Hi,

      Thanks for your inquiry.

      I’m afraid our free credit score page can only accept details from a valid Australian driver’s licence. You may request for a credit score directly from Equifax to ask for other ways to get your credit score. You may go to this page and click on the green ‘Go to Equifax’s website’ then contact them from there.

      Hope this helps,

      Cheers,
      Rench

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