Paying Your Taxes with a Credit Card is Bad News

With tax time approaching, many taxpayers are finding themselves in a financial bind. If you end up owing this year, should you use your credit card to pay the IRS?

With the tax deadline fast approaching, many people are looking to their credit cards to pay off their tax balances. While this may seem like a quick and painless way to take care of your tax burden, it often ends up costing you more in one way or another. Here are some things you should know about paying your taxes with a credit card.

• When you make a credit card payment for your taxes, you are actually making the payment to a third-party company who then sends it to the IRS. These third-party companies charge a fee which can become quite significant depending on your tax debt. With a modest 2.45% fee, you could be paying an extra $122.50 on a $5,000 tax bill. Aren’t there better uses for your money?

• Interest charges can quickly accumulate on a credit card bill after paying your taxes. Interest rates have gone up in the past year and you could get charged other penalties if you are not careful.

• Make sure that your payment will not be considered a cash advance. This happens sometimes and it can cost you big bucks because a cash advance on a credit card has a larger interest rate than a purchase. In addition, the card issuer often charges 3% as a cash advance fee.

• Check into getting an IRS installment loan if you cannot afford to pay your taxes on time. The rates for these types of loans are usually only about 4%, which is much lower than the interest rates you will be paying on most credit cards. You can also try a personal loan with an even lower interest rate to save more money.

• Do not pay your taxes with your credit card simply to get the reward points. Most cards only offer a 1% cash back system which is nowhere near the amount you will pay in interest on your credit card.

• Know your credit limit before charging your taxes to your credit card. If you are close to your limit, you may incur even more fees and penalties on top of the higher interest rate.

The best thing to do if you end up owing taxes is to find out why you have not been paying enough throughout the year. Look over your records and see where you made mistakes so you can adjust the amount you pay so you don’t come out owing next year. Credit cards may seem like a quick fix, but eventually you have to pay that money back, too. It can turn into a vicious cycle if you’re not careful.

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