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When you work for an employer, you will typically fill out a W-4. This form is the Employee’s Withholding Allowance Certificate, which is how an employer determines how much the rate of tax withholding should be. Whatever you declare on that form is what your employer takes out of your check each week. You may have to complete a new W-4 if something happens in your life that could result in a change in how much you’ll owe in taxes.
If you often owe additional taxes, you might need to alter your W-4 to have your employer withhold more. On the other hand, what more often happens is that people have too much withheld, so they receive a tax refund. The refund someone receives yearly is calculated as how much is withheld for federal income tax minus the total federal income tax due for the year.
Does Your Tax Refund Affect Your Credit Score?
Sometimes people wonder if their tax refund affects their credit score. The short answer is no. Your tax refund has nothing to do with your credit score.
Your credit score is a number that is intended to reflect how likely you would be to repay debt. If you were going to get a loan, lenders would look at this score and determine if you’re likely to be a borrower who will repay that loan.
There are actually multiple credit scores. The three main credit bureaus are Equifax, Experian, and TransUnion. The reports that come from these bureaus are then used to calculate your FICO and VantageScore credit scores. Numbers range from 300 to 850.
However, there can be some indirect effects if you use the money you receive from your refund as a way to pay down debt. For example, if you pay off student loan debt with your tax refund, then your score is likely to go up. It has nothing to do with the refund itself, but rather how you used it.
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What Factors Affect Your Credit Score?
So, if your tax refund doesn’t affect your credit score, what does? The following breaks down the specifics of what’s included in the calculation of a credit score.
- Payment history is usually weighted as about 35 percent of your credit score. If you have a history of late payments, it’s going to lower your score.
- The amount of credit you’re using is important. Typically you want to spend 30 percent or less of your available credit. If you spend more, it may bring your score down. If all your cards are maxed out, it’s very likely to negatively affect your score.
- Public records like bankruptcies or items that went to collections are included in your score.
- How long you have had a credit history is a major factor, and it usually accounts for 15 percent of your overall score.
- If you have a lot of new accounts that were opened in a short amount of time, it could be a negative.
- If you have a lot of inquiries where someone did a hard pull of your credit report, particularly in a short period of time, it’s likely to be detrimental to your score.
- If you have too many open accounts, it can also harm your credit score as well.
What Factors Don’t Affect Your Credit Score?
Factors that don’t affect your credit score include personal factors such as your sex, age, or marital status. Your employment status or history don’t affect your score, and any obligations you owe, such as rent or child support, do not affect it either.
Your credit score and tax refund have no direct relationship to one another. However, that doesn’t mean you can’t use your refund to improve your score by paying off debt and lowering the amount of credit you’re currently using.
Author: Ashley Sutphin