Bad Idea
Paying your taxes with your credit card can be a bad idea because of the processing fees attached. If the processing fees are higher than your rewards, what you gain on convenience you lose in dollars when paying by credit card.
Third party providers who process your credit card to pay for your taxes normally change a fee ranging from 1.89% to 3.93% but averaging 2.35%[1] of your tax bill. This can amount to quite a lot. In addition, if you don’t pay your balance off at the end of the month, you pay interest.
You might be tempted to get around the processing fee by sending in the return with your card number on the form. The problem is that isn’t a secure method of payment – anyone can view your credit card number. The reason for using a third-party provider, be it tax preparation software, a tax professional, phone, online, or card payment service provider, is that it is sent securely.
Other considerations
Make sure your payment is a purchase rather than a cash advance. That way, you earn rewards without paying a cash advance fee, which can be as high as 3% or more. Before taking a cash advance, check the annual percentage rate or APR on cash advances, which may be substantially higher than for purchases.
Also check your credit limit. If you must max out your cards to pay your tax bill, that’s going to impact your credit score and in turn your ability to get credit elsewhere for other purchases you may be planning to make.
Good Idea
You have to pay your taxes. There’s no way of getting around that, and if you don’t have enough cash or can’t get a loan, then using a credit card is a good solution.
Why?
Simply, the IRS will put a lien on your property if you don’t pay your taxes. This tax lien will show up on your credit report for at least seven years or even longer if you don’t take care of the debt. The actual impact on your credit can vary, but a tax lien is the worst possible thing to have on your credit report.
Now, you may think that if you already have a good score, it can’t impact you much, but the opposite is true.
“The impact is greatest when the tax lien is recent and where the consumer has no other negative items (missed payment, high credit card balances, etc.) being reported. In these cases, the tax lien can drop the score by 100 points or more.”[2]
You don’t want that! File an income tax extension if you have to and use your credit card if you have to. If you do have rewards, at least you can mitigate some of the extra costs of using the card, and your credit score remains intact!
[1] http://ctwatchdog.com/finance/paying-taxes-with-a-credit-card-is-usually-a-bad-idea
[2] http://money.msn.com/credit-rating/article.aspx?post=66f8cec0-2339-44c6-99bd-95592ce4d84a
