Tax Returns are now being processed by the IRS
Reliable bill payment and credit utilization percentages affect credit scores more than any other factors. To improve their credit, many people use their tax refunds to pay off credit cards. With the recent government shutdown, some are worried that their tax returns are affected, but the IRS confirms refunds are going out on time.
How Do Tax Returns Affect Credit Scores?
The IRS reports no tax return data to credit bureaus, so no direct impacts result. However, many Americans rely on their tax refunds to pay bills, especially credit cards. Credit scores are highly sensitive to credit utilization rates. Reducing debt with tax refund money always helps credit scores.
Why Is There a Fear of Tax Return Delays Due to the Government Shutdown?
The government shutdown made many people nervous about their tax refunds arriving late. Considering the average refund totals $3,000, they have a very good reason. Many are carrying high-interest debt, and their tax refunds provide the only avenue out of debt. Thankfully, the shutdown ended, and the IRS has followed contingency plans during the shutdown to avoid creating a backlog of tax returns.
How Has the IRS Been Affected by the Shutdown?
The IRS furloughed most of its staff during the shutdown. Only staffers deemed essential to preserving life and the organization continued to work without pay during the shutdown. These staffers mainly included security, IT people and criminal investigators. Staffers who process tax returns remained at home. Because past shutdowns resulted in tax return delays, the public became increasingly vocal about this issue as the shutdown dragged on to historic length.
The IRS Contingency Plan
During shutdowns, the IRS top management continues meeting and monitoring the effect of the shutdown on the agency. They call additional workers back when it becomes clear they are now essential. Because the shutdown lasted so long, the public and politicians pressured the IRS to consider tax return processors essential personnel. The IRS agreed.
Early Filers Already Receiving Their Tax Refunds
The IRS decision to resume processing tax refunds before the shutdown ended resulted in early filers receiving their tax refunds by late January. The IRS has announced that its tax refund operations are running normally. The agency pays refunds an average of 21 days after receiving a filing.
Best Ways to Use Tax Refunds for Improving Your Credit Score
Managing credit scores requires focus on several areas. The most important: paying bills on time. Mortgage, car loan and credit card late payments drop scores like stones. Borrowers who have fallen behind should prioritize catching up on these accounts with any tax refund money.
Credit utilization percentages come in second. The credit score formula assumes that high levels of utilization demonstrate financial distress. The borrower has lost income or spent way beyond his or her means. This raises the possibility that the debt will become unsustainable, pushing the borrower into default. Any payments that reduce credit utilization percentages help credit scores.
Borrowers should aim to keep revolving debt levels below 30 percent. Ideally, debt levels remain below 10 percent. Payments on over-limit and close-to-the-limit revolving accounts help credit scores the most.
Assuming the borrower has no over-the-limit or near-the-limit credit cards, paying off the highest interest credit cards and payday loans provides the biggest credit score boost. As interest builds, credit utilization rates climb too high very quickly. The only way to mitigate the damage is by paying off these high-interest accounts, and a substantial tax return offers a great way out of the high-interest debt cycle.
Other Options for Helping Your Credit Score Include:
- Paying off collection accounts.
- Becoming an authorized user on a high-limit account with a solid payment history.
Authorized users enjoy the same score-enhancing benefits as the account holder. People with poor credit scores can move up to a good credit score while those with good credit can move into the great tier. The higher the limit and the longer the account has been opened, the bigger the credit score boost.
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