Tax season is approaching, and while you’re wondering how your tax return will affect your bank account, you might also want to consider how it could influence another aspect of your financial well-being – your credit score.
Although your tax return is not directly tied to your credit report, it can affect your score in indirect ways. For example, if you use your 2010 tax refund to pay down some outstanding credit balances, you could boost your credit score. Or, if you don’t have the resources to pay your entire tax bill up front, you may find yourself in a situation in which it’s difficult to pay other bills too, and slow or missed payments can also affect your credit score.
If you better understand your credit, you may be better equipped to deal with your tax situation if you end up owing, and to better take advantage of your windfall if you’ll be getting a refund. Websites and monitoring memberships like FreeCreditScore.com, can help you to check, monitor, read and understand your current credit report or score.
Keep in mind that the three major credit bureaus, and several less well-known ones, all have slightly different scoring models. But some common factors can affect your credit score. It’s important to understand how your score works, so keep these factors in mind as tax season approaches:
- Your bill payment history – Potential creditors want to know that you pay your bills on time. If you’ve paid debts in a timely manner in the past, chances are you’ll continue to do so in the future, creditors believe. Generally, your payment history will account for a third of your credit score.
- Total amount you owe – Often, the total amount you owe is also considered against how much credit you have available. You may owe $10,000 in credit card debt, but if you pay on time and still have plenty of unused credit available, your score may be better than someone who has half that amount of total debt, but who either doesn’t pay reliably or has maxed out his available credit. The total amount you owe accounts for a little less than a third of your score.
- Length of credit history – Creditors want to know you have experience paying bills on time. The longer you can demonstrate your financial responsibility, the less you will appear to be a credit risk to potential lenders. That’s why senior citizens often have excellent credit scores, while a young professional who earns more than the senior makes, but who has been using credit responsibly for a shorter time, could have a lower score.
- New credit accounts – Opening too many new accounts, or even just applying for them, could impact your credit score. The idea is that if you obtain a lot of new credit all at once, the temptation to overuse it may cause you to make poor decisions about credit use.
- Type of credit you’re using – Some types of debt that are attached to a tangible asset, such as a mortgage or car loan, are perceived as “good” credit and can actually raise your score. High amounts of unsecured debt, like credit cards, may adversely affect your credit score.
Credit monitoring products can help you better understand the factors that affect your credit score, monitor your credit and obtain your full credit report and scores. At FreeCreditScore.com, you will also find a calculator that can help you estimate how certain financial actions may affect your credit score.
While tax season is often a stressful time, you can reduce some of the worry and better understand your credit by checking your credit score and report now, and educating yourself further on how financial decisions impact your credit.