How to build credit with your tax refund

Tax Day is almost here — and if you’re like many Americans, you may be expecting a refund when you file by the April 15 deadline. In fact, the average amount for filers who’ve received a refund so far in 2024 is $3,081, according to the IRS.

If you already have your regular expenses covered, that windfall is a great opportunity to jumpstart a financial goal. One option is using your tax refund to lay the foundation for a great credit score. Here’s what to know if building credit is one of your 2024 goals.

Building credit with your tax refund

Whether you’re starting from no credit at all or you’ve taken a financial hit that hurt your score, you can use your tax refund to begin making moves toward building long-lasting good credit. Here are a few actions to take.

Open a secured credit card

A secured credit card can be a useful tool if you don’t otherwise have the credit for a traditional card. Secured cards require you to submit a security deposit when you open your account. Because this deposit lessens the potential risk for issuers, these cards are often easier to get approved for, even with a poor credit rating.

A minimum deposit is often required to open an account, and the amount you submit will act as your credit limit. That’s where your tax refund can help — putting a portion (or all) of your refund toward a security deposit can help you obtain a secured card and begin building credit.

Once you’re approved and begin using your card, your payment history gets reported to the credit bureaus like any other credit card. As long as you make sure to pay on time each month and keep your credit utilization low, you can use the secured card to improve your credit score over time.

Here are some secured credit cards to consider today, each of which reports your account activity to the three major credit bureaus:

The OpenSky Secured Visa card doesn’t require credit check, making this a solid option whether you’re starting with a less-than-perfect credit score or no credit at all. The security deposit you make will act as your credit limit; it’s refundable after you close your account and pay any existing balances in full.

This card requires a minimum $200 security deposit, though you can deposit up to $3,000. OpenSky will also evaluate your account every six months to see if you qualify for credit line increases.

Unlike some other secured credit cards, the OpenSky Secured Visa has an annual fee of $35. There aren’t many added benefits, but you can get up to 10% cash back with select merchants through OpenSky Rewards.

The Platinum Secured Card from Capital One is a no-annual-fee secured card with varying minimum deposit options. Every cardholder starts with a minimum $200 line of credit, though your security deposit may range from $49 to $99 to $200, depending on which you’re approved for. If you want to increase your credit limit, you can submit a larger security deposit up to the Platinum Secured card’s $1,000 maximum.

Over time, you can earn back your deposit with good credit habits and qualify to upgrade to the unsecured Capital One Platinum Credit Card. You’ll also get an automatic account review to determine whether you’re eligible for a higher credit limit after a minimum six months.

Another secured card option from Capital One is the Quicksilver Secured Cash Rewards Credit Card. This card has no annual fee and a refundable $200 minimum security deposit. The maximum deposit limit can range from $1,000 to $3,000, though the exact amount is assigned when you’re approved. Like the Platinum Secured, you can earn your deposit back over time and get the chance to upgrade to the unsecured version of this card, the Capital One Quicksilver Cash Rewards Card. And in just six months, you may be considered for a higher credit limit.

There’s another big perk to the Quicksilver Secured card, though. This is one of the only secured credit cards today that you can use to earn cash back on every purchase. Like the standard Quicksilver, you’ll get a flat 1.5% cash back on everything you buy, which you can redeem for statement credits, gift cards, or to cover specific purchases on your account.

Check out our full list of top secured credit cards.

Pay down existing debt

Another way to use your tax refund to build your credit is to put that money toward your existing debt.

Carrying a credit card balance itself doesn’t necessarily hurt your score. But if you have a high balance that’s keeping your credit utilization rate close to your cards’ limits, it may keep your credit score down.

Paying off debt is a smart option, even if the refund doesn’t cover your full balance. Not only can you potentially boost your score by using your refund to make a dent in your credit card debt, but you’ll also move closer to paying down the debt in full and reduce interest costs with a smaller balance.

If the score you have today is high enough to qualify, you might also want to consider a balance transfer credit card. When you transfer your existing card balance to one with 0% APR on balance transfers, you’ll have several months to pay off the debt without adding any more interest charges. Balance transfer cards may have intro periods of up to 21 months and charge balance transfer fees around 3% to 5% of the transferred amount.

More ways to use your tax refund

Beyond building credit, there are plenty of ways your tax refund can help you get ahead of a range of financial goals. Here are a few to consider this year.

Add to your emergency fund

It’s never a bad time to add to your savings — especially when you can earn 4% or even 5% on the amount you put into a high-yield savings account.

If you don’t already have an emergency fund to protect you against unexpected expenses or periods of financial hardship, your tax refund is a great way to start. Experts generally recommend keeping at least three to six months’ worth of expenses in your emergency fund. With your tax refund as a baseline, you can make regular contributions in whatever amount fits your budget to build up the rest over time.

Save for retirement

A tax refund windfall can also help with your annual retirement savings. If you put it in a Roth IRA, for example, you’ll grow your already-taxed money over time and then withdraw your contributions and earnings from it tax-free after you reach retirement age.

Roth IRAs have income limits, so it’s important to make sure you qualify. There’s also a limit to how much you can contribute annually. In 2024, that contribution limit is $7,000, with an additional $1,000 catch-up contribution for investors over age 50.

If you receive the current average refund amount of $3,081, you’d only need to contribute an additional $3,919 over the rest of the year ($4,919 with the catch-up) to max out your account. That’s about $435 a month for the remaining nine months of 2024.

This article was edited by Alicia Hahn

Editorial Disclosure: The information in this article has not been reviewed or approved by any advertiser. The details on financial products, including card rates and fees, are accurate as of the publish date. All products or services are presented without warranty. Check the bank’s website for the most current information. This site doesn't include all currently available offers.