Does Your Credit Score Affect Your Tax Refund?

Americans received an average federal income tax refund in 2012 of just over $3,000. In fact, most taxpayers receive a refund, rather than having to pay extra when they file their tax return. No mystery exists as to why a taxpayer receives a refund. It really boils down to simple math, and that more was paid in taxes than was due. While a credit score affects many parts of your financial life, it in no way affects your income tax refund.

Reasons for a Tax Refund

You will generally receive an income tax refund because you overpaid your taxes for the year through over-withholding. It is not always that simple, however. You may also receive a tax refund because of refundable tax credits that cause you to overpay your taxes. Refundable tax credits are tax credits that are payable to you even if you do not owe any money in taxes. Examples of refundable credits include the adoption tax credit and some educational expense credits.

More Money During the Year

If you receive a large tax refund every year, consider modifying your form W-4 so that your employer withholds less money in taxes each pay period. You will need to increase the number of withholding allowances to reduce the taxes withheld. Form W-4 has a worksheet you can complete to assist you. Decreasing withholdings will result in a lower overpayment at the end of the year, and a smaller refund. The biggest benefit is more money in your paycheck each week.

Who Uses Credit Scores?

While it doesn't affect your tax refund, your credit score affects many parts of your life. It is most often used by lenders to make a decision about granting credit or a loan, but it is also used by employers who are considering offering you a job. The thought is that a person with a higher credit score might be more reliable and perform the job better. A landlord might also use your credit score to determine if he wants to rent you an apartment. Insurance companies might review a credit history before writing a policy for you, because data shows people with better credit are less likely to file a claim.

Improving Your Score

A credit score is based on many factors that give an insight into how you use credit. The score is a three-digit number, ranging from the poorest score of 300 to the highest possible score of 850. Generally, a score over 700 is considered good. Credit reporting agencies calculate these scores based on information about you reported by creditors and taken from public records, such as bankruptcies and tax liens. Making your payments on time is a big factor in a good credit score. The percentage of available credit that you utilize is another important factor.

About the Author

Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.

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