Paying Taxes with Credit Cards: The Dos and Don’ts

Unfortunately, many Americans will see a bill from Uncle Sam instead of a refund this tax season. Underpaying throughout the year can lead to a hefty sum by April 17, one that is difficult to bear. If you are wondering, “How can I fix my credit and pay my tax bill?” you may be looking for a way out. In the height of panic, some people use their credit cards to stifle anxiety. Don’t let stress overshadow your judgment, however.

Working toward credit repair is a multifaceted process, one that can be sabotaged with poor decisions. In that regard, choosing to pay bills with a credit card is risky, especially as a means to an end. Taking on one debt to cover another is never the answer. That said, there are certain benefits and considerations to doing so. Consider the following dos and don’ts of charging your tax bill.

Do:

• Consider the long-term commitment. The main benefit of charging your tax bill is time. If you cannot afford the full balance today, smaller credit card payments may be the answer you seek. Although this is true, you will also be paying interest on the total balance, stretching your debt further and leading to a larger commitment over time. That means less money for savings and credit repair. If you can’t afford to pay your taxes, consider a credit card as your last resort.

• Remember your credit utilization ratio. Even if you can afford to pay off your credit card balance in a timely and efficient manner, there is another factor that threatens every credit score. Your credit utilization ratio, or the amount you owe on all revolving credit accounts vs. your summed credit limits, accounts for a large portion of your financial reputation. Ideally, you should never charge more than 25% of your total limit. Do the math to determine how charging your taxes will affect that ratio. If your debt exceeds the recommended percentage, your credit score is at risk.

• Review the perks. Some taxpayers choose to charge their bills for the sole purpose of rewards. Airline miles, “cash back,” and corporate status are all valid reasons to whip out the plastic. If you are part of the latter group, make sure to pay off your balance immediately. Without proper execution, even the best laid plans can result in unforeseen trouble.

Don’t:

• Forget about the mandatory fees. The IRS isn’t selfless in their payment options. Expect a mandatory processing fee of about 2.5% when you pay by credit card. Therefore, if your tax bill is $5,000, the final tally will actually cost $5,125. Before charging your tax bill, compare the fees you’ll pay to the perks you’ll accrue by paying your tax due with plastic. Unfortunately, you could end up losing money.
• Forget about IRS extensions and payment plans. Inability to pay is among the top reasons for charging a tax bill. However, the IRS offers other, more credit repair-friendly options.

o Extensions. Filing for an extension provides several months of relief, allowing you to pay last year’s taxes as late as October. The best part? A fee of only 1% is added to the balance due, meaning that you’ll only pay an extra $20 on a $2,000 tax bill. Not only will you have time to save, but your credit repair efforts are protected.

o Payment plans. If an extension won’t cover your needs, signing up for a payment plan could be the solution. Rather than relying on your credit card, establishing a payment schedule with the IRS can help you chip away at your debt in manageable increments. After a one-time fee of $105, monthly interest is applied. Compare the IRS terms to your credit provider’s to determine the better deal.