Why Using a Credit Card to Pay Your Tax Bill is a Bad Idea

I’m here to tell you something really important – listen up! It’s not a good idea to pay your tax bill with a credit card. I know it might seem tempting, but trust me, there are some big downsides you need to know about.

First things first, let’s talk about the fees. When you use a credit card to pay your taxes, there’s usually a fee involved. And guess what? It can be pretty high! I’m talking about extra money that you have to pay on top of what you already owe. Yikes!

But wait, there’s more. When you use a credit card, you’re basically borrowing money to pay your taxes. And just like any other loan, you have to pay it back. Now, if you can’t pay off your credit card balance right away, you could end up paying a lot of interest. That means you’ll be paying even more money in the long run. Not cool, right?

Another thing to consider is your credit score. Using a credit card to pay your taxes might have a negative impact on your credit. Why? Well, when you use a large portion of your available credit, it can make you look like a riskier borrower. And that’s not something you want, especially if you’re planning to get a loan or a mortgage in the future.

So, what’s the bottom line? It’s simple – don’t pay your tax bill with a credit card. Those fees and potential interest charges can add up quickly. Plus, you don’t want to risk damaging your credit score. Instead, look for other payment options that won’t cost you extra money and won’t put your financial future at risk. Trust me, it’s the smart move to make.

Filing taxes is like getting hit with a major case of allergies. It’s something you don’t want to deal with, but come April, it hits you hard. Now, you’re stuck figuring out how to handle it. You know you have to pay your taxes, and maybe you’re thinking about putting it on your credit card. It seems like a tempting option – maybe you need more time to come up with the money, or you’re fantasizing about the rewards you could earn by charging such a big expense. But let me tell you, paying the IRS with your credit card is probably not the best idea, and here’s why.

Drawbacks of Using a Credit Card to Pay Taxes

You’ll Be Charged Processing Fees

When you use your credit card to buy something, the merchant has to pay fees to the financial institutions involved in the transaction. However, when you use your credit card to pay your taxes, it’s not the IRS who foots the bill for those fees – it’s you.

If you want to use a credit card to pay your federal taxes, the IRS requires you to go through one of their credit card processors. These processors charge fees, usually between 1.87 and 2 percent of the amount you put on the card. Be aware that if you file your taxes online using software like TurboTax, the fees may be even higher.

These fees can take away from the rewards you earn on your credit card. Most cards only offer a 1 to 1.5 percent rewards rate for this kind of transaction.

There is an exception, though. If you use a credit card with a rewards rate of 2 percent or higher and pay off the full amount on your next statement, you might end up with rewards that outweigh the fees, but it would be a very slim margin.

You Might Have to Pay Interest Charges

You know, depending on how high your credit card interest rates are, you could end up shelling out a whole bunch of money, warns Trish Evenstad, the head honcho of the Wisconsin Society of Enrolled Agents, a group of tax wizards. So, if you find yourself in a situation where you can’t pay off your taxes all at once, here’s what I suggest: pay as much as you can by the April 18th deadline. Then, you can team up with the IRS and set up an installment plan to tackle the remaining balance.

Hold up, how does this all work?

In this year, it’ll cost you $31 to set up an installment plan online if you qualify, the IRS website says. And you’ll need to link it to your checking account for direct debit payments. But that’s not all, my friend. You’ll also be dealing with a pesky 4 percent annual interest on your unpaid federal taxes and a penalty of 0.25 percent of the money you owe for each month you’re on the plan. Crunching the numbers, that comes out to an annual percentage rate of about 7 percent. Yikes!

Let me tell you, this is a whole lot better than that 13.61 percent average APR that the Federal Reserve says people had to deal with for their credit card accounts in the last quarter of 2016.

But here’s the catch: If you can pay off what you owe before the promotional period ends, using a credit card with 0 percent APR might be a smarter move than setting up an installment plan.

There’s a Risk of Hitting Your Credit Limit

If you charge a big tax bill on your card, you might find yourself getting dangerously close to your credit limit. That means you could end up maxing out your account and having to deal with some penalties. Plus, this could negatively impact your credit score.

When I’m trying to figure out my financial situation, says Cari Weston, the director of tax practice and ethics for the American Institute of Certified Public Accountants, I look at whether I need to have my credit card available for emergencies. If I don’t have enough money set aside for unexpected expenses, it’s probably not a good idea to add credit card debt.

There is one exception: if your credit card has a high enough limit that charging your tax bill won’t affect your ability to make other purchases or damage your credit score.

There are Better Ways to Pay

• First, figure out how long you will need to pay off your taxes. If you can pay the full amount within 120 days, you won’t have to pay any setup fees.

If you want to handle your tax obligations in a convenient and cost-effective way, here’s what you can do:

First, go online. The best option is to set up an online installment agreement with direct debit. It only costs $31 to set it up and ensures that your payments are automatically deducted each month. If you choose to set it up offline and without automatic payments, you’ll have to pay a hefty fee of $225. Remember, for state taxes, you’ll need to set up a separate payment plan with your state, which may have different rates.

Second, choose a long repayment period. It’s important to make payments on time and avoid falling behind. To do this, take advantage of the longest repayment period the IRS offers. Commit to an amount that you are confident you can pay. The good news is that you can always pay more if you’re able to. By paying off your tax debt faster, you’ll save money on interest and penalties.

By following these steps, you can handle your tax obligations in a way that works for you. It’s important to stay on top of your payments and choose the option that fits your financial situation. Remember, paying your taxes doesn’t have to be overwhelming; with the right strategy, you can take control and fulfill your obligations in a manageable way.