Using Your Tax Return to Pay Down Your Cards (and Not Hurt Your Score)

It's tax time and my inbox is full of questions about the most strategic way to use your tax return to get out of debt and I figured it was high time I share my best strategies with you.

If you’re getting a tax return back and you’re staring down some credit card debt, it seems like good advice to use your tax return and pay as much as you can or all of your credit card debt off. But if you’ve been maxed for a long or have fallen behind on your payments, you might wind up damaging your credit score.

30% of your score is made up of your debt utilization, meaning how much credit do you use versus how much do you have available. You get the most points for 1% usage, but anywhere between 1-10% is fine. Anything over 30% starts to hurt your score. Incidentally, you get fewer points for 0% usage than 1% or more, so using them helps your score.

If you’ve been maxed for a long time or you’ve missed some payments, you’ve given your bank reason to have concerns about your financial stability.

In my work in credit strategy and repair, I see people this time of year get all excited about paying down their cards but get a nasty surprise when the bank turns around and slashes their credit card limits. I’ve recently had someone come to me who was maxed on a 5k limit card, paid 4k all at once and got their limit slashed to 1k. This put them at 100% utilization again and dropped her score 75 the points she had gained in one month.

Just going from maxed out to under 10% usage can raise or drop your score 100 points in one month.

This is especially painful if you’re trying to pay off your cards to get a better score to qualify for new financing like a mortgage.

If you’ve got the cash to pay down your cards but you want to maintain or improve your credit score, break up the payments into 3-4 payments. Yes, you will pay more in interest, but if you’re going for a big loan like a mortgage, you’re going to save in the long term on interest with that loan.

If you don’t have enough cash to pay off your cards, you can still use this to fast track your way out of credit card debt. You should still break up your payments, but once you start putting a dent in the balance you will see your score start to rise unless you have some other more serious issues like collections, charge-offs, judgements, liens etc (if you need help with that, learn more here or sign up for a free consultation here).

Advanced Techniques For Getting Out of Credit Card Debt:

Add, But Don’t Use More Credit

Being in credit card debt is a rock and a hard place. You need to move your debt utilization ratios to qualify for a balance transfer card with 0% interest so you can get out, but you can’t qualify for a balance transfer card without moving some numbers.

You’ve got two options here and they both involve getting more credit.

Get added as an authorized user: If your partner, spouse, sister, a friend has a card with perfect payment history and a low balance, they can add you to the card as an authorized user and it will look like you’ve had the card since they opened it. This is especially powerful if you’ve got a short credit history of you’ve missed some payments. But the main impact for helping you get out of credit card debt is that it will also help lower your debt utilization ratios. This counts for less in the newer scoring models like the FICO9 but still counts for a lot in the mortgage scores. This isn’t fool proof. It works best with cards that ask for your social security number and/or you live at the same address.

Nothing you’ve got going on can ruin their credit or impact them in any way unless you run the card up. My advice is to not get a physical card so the line is clear that you can’t run up the card.

Get more credit:

One of my favorite cards for this is from MyJewlerlyClub. They will give nearly anyone a 5k limit. Make a small purchase, and get that 5k line added to your report with low usage. The one caveat is if you've got upaid, charged off cards. You probably won't get approved.

Going back to the original 5k and maxed example, let’s say you get your tax return and pay down 1k of the balance. Then you add the 5k MyJeweleryClub Card and your partner adds you to another 5k card with a low balance. You’ve got 4k in balances, but now you’ve got 15k in available credit. You’re now at 27% usage, and you’re going to be in much better shape for a balance transfer card.

Adjust the Numbers That Report To The Credit Bureaus

90% of credit card companies only report to the credit bureaus once a month. They report the amount on the card the day the statement closes, which is usually 3-4 days after the payment due date. This is also the date on your statement. You can always call and ask to be double sure.

Let’s say you get paid on the 1st, your payment due date is the 2nd, and your statement closes on the 5th. Take as much cash as you can from the paycheck on the 1st and put it towards the balance. Keep the card as low as you can until after the 5th. Once the statement generates, you could run the card up the next day (the 6th in this example), but you’ll have a window of time where the balance reporting might be low enough to help you eek out enough points for a balance transfer card.

Using your card and paying it off like this is a good way to keep the goodwill going with your credit card company, especially if you’ve been behind or been maxed. This can help you get credit line increases in the future, and even if you don’t use them they can helpful to have if you need a balance transfer card.

You can also use this technique to pay less interest while you’re paying the card off. Interest is calculated with most cards on the balance on the day the statement generates. If you’ve got 2k a month in cash and $500 of that allotted for your credit card, you can still use the card, but every month set yourself a spending limit to reflect the $500 you want to go towards the prior balance.

Balance Transfers

Once you start paying down your cards and adding other lines (if possible) watch your score rise and start looking for a balance transfer card.

I’ve written before how Credit Karma scores are not the ones you should be looking at for car or mortgage loans, but generally if Credit Karma recommends a credit card and says you’ve got good odds of getting approved you should get approved for that card. It’s a useful way to make sure you’re in good shape before you apply for a card. Be sure you do the math to make sure any fees associated with a balance transfer make it worth it (they usually do).

If you don’t get approved for the full amount you need, be sure to call and ask for reconsideration. If they tell you they need to do a hard pull on your score again to increase your limit it’s generally worth it. Another hard pull will cost you about 5 points, but getting the debt utilization ratios adjusted will more than outweigh that 5 point drop.


PS. If you've got your tax return and want to pay in full for credit help, I'm offering a 30% discount for paying by check. Bill pay check is fine. Make an appointment or send me an email to get started.



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