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What You Need to Know Before Paying Your Taxes with Credit

Need to Know Before Paying Your Taxes with CreditTax time can be pretty stressful, especially if you do not have the money to pay what you owe. The IRS accepts credit cards for tax payments, but does this mean you should be quick to pull out your credit card to pay your bill? Think twice, because it will cost you.

When you don’t have the cash in savings to cover a tax bill, you need to figure out which type of payment will cost you the least amount of money. Some people stuck with a high bill turn to an installment plan with the IRS, but many people just don’t like the idea of owing the IRS money.

If you’re like many consumers, you may even be thinking about using credit to pay your taxes just to earn rewards. This can be an even bigger mistake!

Here is what you need to know before you use a credit card to pay your taxes this year.

 

You Will Pay Convenience Fees

If you use a debit card to pay your taxes, you will pay a flat-rate convenience fee of $2.99 to $3.95, regardless of the total you are paying. This fee is much higher if you’re paying by credit: 1.89% to 2.35%.

If you’re paying a $4,000 tax bill, that means you will pay up to $120 upfront just to pay your bill.

 

You Will Pay Interest on the Taxes

Of course, using a credit card also comes with interest charges. The average credit card interest rate is 15%. If you charge a $4,000 tax bill and manage to pay $200 a month until it’s paid off, it will take you a full 2 years to pay off the balance and you will end up paying $632 in interest!

 

Your Card Issuer May Think You’re a Risk

Card issuers watch where customers use their credit card, believe it or not. If you use your credit card to pay your taxes, your card issuer may believe you are having financial trouble, assuming no one would use credit unless they cannot afford to pay their taxes. This means your card issuer may raise your interest rate, lower your limit or cancel your account altogether.

 

Paying By Credit Can Harm Your Credit Score

An IRS installment plan will not affect your credit rating, but the same can’t be said of paying by credit. A significant part of your credit score is how you use your available credit. If paying your taxes uses up a good percentage of your available credit, your credit score will take a hit. If you pay late, your credit will be hurt even further.

 

Earning Rewards on Your Tax Payment

Some taxpayers think paying their taxes with their credit card is a good way to earn rewards. It can be, but only sometimes.

Most card issuers give you cash back or rewards points equal to 1% of your spending, whereas the convenience fee you pay could be more than 2%. That means the convenience fee will automatically cancel out your rewards.

If you earn more rewards than 1% back — and your tax payment qualifies for rewards from your card issuer — it is possible to come out ahead, but only if you are not paying interest.

 

Is Paying By Credit Ever a Good Idea?

If you have a credit card with a promotional 0% introductory rate, you may end up getting a better deal than you would with the IRS payment plan. You still need to be careful that you are paying off your balance in full before the promotion ends. If you are late on your bill even once, your rate will also reset to the standard or default rate, which may be over 20%.

 

Before Using Credit, Compare Your Options

The bottom line is paying with a credit card can cost you big. It’s a good idea to compare the costs of paying by credit with the cost of setting up an installment agreement with the IRS instead.

The IRS charges just 3% interest, which is far below credit card rates, and a one-time fee of $105 to set up your installment plan, or just $52 if you have payments automatically deducted from your bank account.

About Christine Smith

Christine Smith is an editor and freelance writer. She covers real estate and business news for US Money Ledger.

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